Optimal trading strategy during bull and bear markets for Hong Kong-listed stocks
Abstract
The “buy-and-hold” strategy based on the EMH was believed by many people to be optimal for a long time. However, there has been more criticism on the EMH since the global financial crisis in 2008. Hence many people attempt to find a trading strategy to beat “buy-and-hold”. Moreover, the financial market fluctuates a lot. Sometimes it is in a bull market, but it may be in a bear market during other periods of time, so the optimal strategy during different periods of time may vary and hence switching of strategies may be necessary. In this study, we apply Hui and Chan (2018)’s generalized time-dependent strategy on 12 Hong Kong listed stocks during the whole period of observation and two sub-periods. The results show that when the sub-period December 31, 2004–December 31, 2008 is chosen, the strategy outperforms “buy-and-hold” by the largest extent. This reflects that the strategy is most effective during adverse market conditions. This study can help investors to apply appropriate trading strategies to earn more profits, and help property practitioners to improve their strategic property management to increase the value of their portfolio.
Keyword : trading strategy, Shiryaev-Zhou index, “buy-and-hold”, moving-window size, optimal
How to Cite
Hui, E. C., & Chan, K. K. K. (2018). Optimal trading strategy during bull and bear markets for Hong Kong-listed stocks. International Journal of Strategic Property Management, 22(5), 381-402. https://doi.org/10.3846/ijspm.2018.5222
This work is licensed under a Creative Commons Attribution 4.0 International License.
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Markowitz, H. M. (1952). Portfolio selection. Journal of Finance, 7(1), 77-91.
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Mori, M., & Ziobrowski, A. J. (2011). Performance of pairs trading strategy in the US REIT market. Real Estate Economics, 39(3), 409-428. https://doi.org/10.1111/j.1540-6229.2010.00302.x
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Samuelson, P. A. (1969). Lifetime portfolio selection by dynamic stochastic programming. Review of Economics and Statistics, 51, 239-246. https://doi.org/10.2307/1926559
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Wong, W. K., Wright, J. A., Yam, S. C. P., & Yung, S. P. (2012). A mixed Sharpe ratio. Risk and Decision Analysis, 3, 37-65.
Yam, S. C. P., Yung, S. P., Zhou, W. (2012). A unified ‘bang-bang’ principle with respect to R-invariant performance benchmarks. Theory of Probability and Its Applications, 57(2), 405-414. https://doi.org/10.4213/tvp4457
Yam, S. C. P., Yung, S. P. and Zhou, W. (2012a). Optimal selling time in stock market over a finite time horizon. Acta Mathematicae Applicatae Sinica, 28(3), 557-570. https://doi.org/10.1007/s10255-012-0169-z
Yam, S. C. P., Yung, S. P. and Zhou, W. (2009). Two rationales behind the “buy-and-hold or sell-at-once” strategy. Journal of Applied Probability, 46, 651-668. https://doi.org/10.1239/jap/1253279844
Ambrose, B. W., & Diop, M. (2014). Spillover effects of subprime mortgage originations: the effects of single-family mortgage credit expansion on the multifamily rental market. Journal of Urban Economics, 81, 114-135. https://doi.org/10.1016/j.jue.2014.03.005
Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: the common stock investment performance of individual investors. Journal of Finance, 55(2), 773-806. https://doi.org/10.1111/0022-1082.00226
Basse, T., Kruse, R., & Wegener, C. (2017). The walking debt crisis (No. 2017-06). Department of Economics and Business Economics, Aarhus University.
Bekaert, G., Ehrmann, M., Fratzscher, M., & Mehl, A. (2014). The global crisis and equity market contagion. Journal of Finance, 69(6), 2597-2649. https://doi.org/10.1111/jofi.12203
Cheng, P., Lin, Z., & Liu, Y. (2010). Illiquidity, transaction cost, and optimal holding period for real estate: theory and application. Journal of Housing Economics, 19(2), 109-118.
Dai, M., Jin, H., Zhong, Y., & Zhou, X. Y. (2008). Buy on the lows and sell on the highs. Working Paper, University of Oxford.
Deremble, C., Seager, P., Potters, M., & Bouchaud, J. P. (2014). Two centuries of trend following. Retrieved from arXiv.org
Dooley, M., & Hutchison, M. (2009). Transmission of the US subprime crisis to emerging markets: evidence on the decoupling–recoupling hypothesis. Journal of International Money and Finance, 28(8), 1331-1349. https://doi.org/10.1016/j.jimonfin.2009.08.004
Du Toit, J., & Peskir, G. (2008). Selling a stock at the ultimate maximum. Annals of Applied Probability, 19, 983-1014. https://doi.org/10.1214/08-AAP566
Gallo, J. G., Lockwood, L. J., & Zhang, Y. (2013). Structuring global property portfolios: a cointegration approach. Journal of Real Estate Research, 35(1), 53-82.
Hatemi-J, A., Roca, E., & Al-Shayeb, A. (2014). How integrated are real estate markets with the world market? Evidence from case-wise bootstrap analysis. Economic Modelling, 37, 137-142. https://doi.org/10.1016/j.econmod.2013.10.037
Hui, E. C. M., & Chan, K. K. K. (2014). Can we still beat “buy-and-hold” for individual stocks?. Physica A: Statistical Mechanics and its Applications, 410, 513-534. https://doi.org/10.1016/j.physa.2014.05.061
Hui, E., & Chan, K. (2018). A new time-dependent trading strategy for securitized real estate and equity indices. International Journal of Strategic Property Management, 22(1), 64-79. https://doi.org/10.3846/1648715X.2016.1260072
Hui, E. C. M., & Chen, J. (2012). Investigating the change of causality in emerging property markets during the financial tsunami. Physica A: Statistical Mechanics and its Applications, 391(15), 3951-3962. https://doi.org/10.1016/j.physa.2012.03.007
Hui, E. C. M., Wright, J. A., & Yam, S. C. P. (2014a). Calendar effects and real estate securities. Journal of Real Estate Finance and Economics, 49(1), 91-115. https://doi.org/10.1007/s11146-012-9398-4
Hui, E. C. M., & Yam, S. C. P. (2014). Can we beat the “buy-and-hold” strategy? Analysis on European and American securitized real estate indices. International Journal of Strategic Property Management, 18(1), 28-37. https://doi.org/10.3846/1648715X.2013.862190
Hui, E. C. M., Yam, S. C. P, Wright, J., & Chan, K. K. K. (2014b). Shall we buy and hold? Evidence from Asian real estate markets. Journal of Property Investment and Finance, 32(2), 168-186. https://doi.org/10.1108/JPIF-09-2013-0059
Hui, E. C. M., Yam, S. C. P., & Chen, S. W. (2012). Shiryaev-Zhou index – a noble approach to benchmarking and analysis of real estate stocks. International Journal of Strategic Property Management, 16(2), 158-172. https://doi.org/10.3846/1648715X.2011.638946
Kim, K. H., & Renaud, B. (2009). The global house price boom and its unwinding: an analysis and a commentary. Housing Studies, 24(1), 7-24. https://doi.org/10.1080/02673030802550128
Krystalogianni, A. and Tsolacos, S. (2004). Regime switching in yield structures and real estate investment. Journal of Property Research, 21(4), 279-299. https://doi.org/10.1080/09599910500182108
Malkiel, B. G. (2003). The efficient market hypothesis and its critics. The Journal of Economic Perspectives, 17(1), 59-82. https://doi.org/10.1257/089533003321164958
Malkiel, B. G. (2005). Reflections on the efficient market hypothesis: 30 years later. Financial Review, 40(1), 1-9. https://doi.org/10.1111/j.0732-8516.2005.00090.x
Malkiel, B. G., & Fama, E. F. (1970). Efficient capital markets: a review of theory and empirical work. Journal of Finance, 25(2), 383-417. https://doi.org/10.1111/j.1540-6261.1970.tb00518.x
Markowitz, H. M. (1952). Portfolio selection. Journal of Finance, 7(1), 77-91.
Merton, R. C. (1971). Optimum consumption and portfolio rules in a continuous-time model. Journal of Economic Theory, 3, 373-413. https://doi.org/10.1016/0022-0531(71)90038-X
Mori, M., & Ziobrowski, A. J. (2011). Performance of pairs trading strategy in the US REIT market. Real Estate Economics, 39(3), 409-428. https://doi.org/10.1111/j.1540-6229.2010.00302.x
New York Times. (2009). Poking holes in a theory on markets. Retrieved from http://www.nytimes.com/2009/06/06/business/06nocera.html?scp=1&sq=efficient%20market&st=cse
Richardson, H. R. (1989). A minimum variance result in continuous trading portfolio optimization. Management Science, 35, 1045-1055. https://doi.org/10.1287/mnsc.35.9.1045
Samuelson, P. A. (1969). Lifetime portfolio selection by dynamic stochastic programming. Review of Economics and Statistics, 51, 239-246. https://doi.org/10.2307/1926559
Shiryaev, A. N., Xu, Z. Q., & Zhou, X. Y. (2008). Thou shalt buy and hold. Quantitative Finance, 8(8), 765-776. https://doi.org/10.1080/14697680802563732
Volcker, P. (2011). Financial reform: unfinished business. New York Review of Books, November 24, 2011 Issue.
Wong, W. K., Wright, J. A., Yam, S. C. P., & Yung, S. P. (2012). A mixed Sharpe ratio. Risk and Decision Analysis, 3, 37-65.
Yam, S. C. P., Yung, S. P., Zhou, W. (2012). A unified ‘bang-bang’ principle with respect to R-invariant performance benchmarks. Theory of Probability and Its Applications, 57(2), 405-414. https://doi.org/10.4213/tvp4457
Yam, S. C. P., Yung, S. P. and Zhou, W. (2012a). Optimal selling time in stock market over a finite time horizon. Acta Mathematicae Applicatae Sinica, 28(3), 557-570. https://doi.org/10.1007/s10255-012-0169-z
Yam, S. C. P., Yung, S. P. and Zhou, W. (2009). Two rationales behind the “buy-and-hold or sell-at-once” strategy. Journal of Applied Probability, 46, 651-668. https://doi.org/10.1239/jap/1253279844