Market-timing model: Do investment banks time the market? (Excel)

How do investment banks and hedge funds beat the market? Do they invest in undervalued assets, and thus get positive alphas, or anticipate the general market movements, investing and disinvesting from risky assets accordingly? There is a simple model that can shed some light on the question, and today we are going to learn how to implement it in Excel.
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[@NEDLeducation]

You can find the spreadsheets for this video and some additional materials here: drive.google.com/drive/folders/1sP40IW0p0w5IETCgo464uhDFfdyR6rh7 Please consider supporting NEDL on Patreon: www.patreon.com/NEDLeducation

[@Shaunmcdonogh-shaunsurfing]

I’m shocked there’s not more comments on this. Idea blew my mind. Very well thought of and taught!

[@NEDLeducation]

Hi, and many thanks for such kind words!

[@sjkcnss2195]

Very nice video sir , kindly also share a video regarding stock selection ability

[@NEDLeducation]

Hi, and glad you liked the video! As for your question, stock selection ability can be measured using Jensen's alpha, information ratio, or appraisal ratio. I have got videos on these concepts, check it out if you are interested: kzbin.info/www/bejne/aIG8qJWMgtSpepI and kzbin.info/www/bejne/lXTbeHSomdRof8k

[@akshaydamani]

Excellent video. Very clearly explained. Just a request can you also do a video on HENRIKSSON AND MERTON model which uses a dummy variable. Grateful

[@NEDLeducation]

Hi Akshay and glad you liked the video! Will definitely cover the Henriksson and Merton model at some point in the future, thanks for the suggestion!

[@akshaydamani]

@@NEDLeducation Hi, it will be useful if you can cover the Henriksson and Merton model as it can be jointly understood with the Treynor-Mazuy model that you have made a video on. Looking forward to it. Thank you. Stay safe.

[@alwaystoyou123]

@@NEDLeducation Thanks Akshay for requesting. I am also interested in Henriksson and Merton Model

[@alwaystoyou123]

@@NEDLeducation Would love to see it? Any updates regarding that?

[@farzanabegum5387]

Hello sir..I hv data on monthly ret of portfolio and monthly returns of Market and risk free rate as well..i want to do Treynor mazuyy and Henrickson Merton modell for my data..can u plz help me with this..iam not able to undstd wat figure to take for gamma and wat fir Error

[@megancummins2904]

can you just run a regression using the regression function in the data tool? will that give the same output?

[@NEDLeducation]

Hi Megan, and thanks for the question! Yes, that will give the same result!

[@jamesroche5934]

Hi, is the market timing model you are using the same as the Treynor-Mazuy model of market timing?

[@NEDLeducation]

Hi James, and thanks for the question! Yes, this is correct!

[@jamesroche5934]

@@NEDLeducation Do you have any demonstration on the henrikkson merton model of market timing? Thanks!

[@NEDLeducation]

@@jamesroche5934 Hi again James, and thanks for the suggestion! Will make a video on this soon. Long story short, the specification is different in only one term: instead of squared market return, an additional explanatory variable is included which is equal to the maximum of zero and negative excess market return. There is also a pretty technical correction for heteroskedasticity Henrikkson suggests which I can probably discuss in some other tutorial as it can theoretically be relevant to models other than market timing (though is rarely applied). Hope this helps!

[@kyrylyanovych2513]

How do you advise to calculate mean of return? Arithmetic, geometric or harmonic? Thank you)

[@NEDLeducation]

Hi and thanks for the question! Geometric mean (PRODUCT(1+ARRAY)^(1/N) - 1 in Excel that I always use in the videos) is strongly preferable due to the fact it accounts for the continuous compound interest.

[@kyrylyanovych2513]

@@NEDLeducation geomean in excel calculations and your formula. Is it same? Thank you for your answer

[@NEDLeducation]

Yes, it is the same, "geometric mean" in terms of returns always refers to this method.

[@akshaydamani]

In case there is Risk free daily data available, then, how do we go about it..thanks

[@NEDLeducation]

In this case, you can subtract the daily risk-free rate from all return variables to convert them to excess returns. However, this would not alter the results too much as daily risk-free rates are typically very low. Hope it helps!