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Testing for market timing ability: A framework for forecast evaluation
Affiliation:1. School of Business, East China University of Science and Technology, Shanghai 200237, China;2. Institute of Physics, Academia Sinica, Taipei 115, Taiwan;3. School of Information Science and Engineering, East China University of Science and Technology, Shanghai 200237, China;4. Journalism and Communication School, Jinan University, Guangzhou 510632, China;5. School of Science, East China University of Science and Technology, Shanghai 200237, China;6. Research Center for Econophysics, East China University of Science and Technology, Shanghai 200237, China;1. College of Computer Science and Information Technology, King Faisal University, Saudi Arabia;2. Center for Artificial Intelligence and Robotics (CAIRO), Faculty of Science, Aswan University, Egypt
Abstract:In this paper we examine the Henriksson-Merton test of market timing and its potential usefulness in evaluating investment advice. The paper proposes a natural extension of the test that is valid under more general assumptions about the distribution of asset returns. We show that the Henriksson-Merton test and its more general counterpart are special cases of standard tests of market rationality and efficiency. Both tests are applied to a group of foreign exchange advisory services.
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