An Assessment of select market timing strategies performance in Nairobi Securities Exchange
Date
2019-08
Authors
Ng'ang'a, Judah
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
Herding behavior among Kenyan traders in the capital markets has been majorly
attributed to low levels of income and lack of knowledge in trading principles. This focus
of this study was on the latter challenge. The study sought to avail information to traders
in NSE regarding the profitability of select market timing strategies. The study evaluated
the performance of three market timing strategies namely the relative strength index
(RSI), simple moving averages (SMA) and hidden Markov model (HMM). The data
considered in this study included the share price of the NSE-20 index over the period
2004-2018 triangulated to the perceptions and opinions of trading experts in Kenyan fund
manager firms. The performance of market-timing strategies in this study was determined
by a strategy's ability to generate above market returns as well as the accompanying
Sharpe ratio. Using Henrikson and Merton market timing model, this study shows that all
the market timing strategies have positive market timing strategies, with HMM having
the best market timing ability. By accommodating the autoregressive nature of financial
prices this study examined the ability of the strategies to time the market using an ARDL
model.
The model shows that all the strategies lack the ability to time the market but just like in
HM model, HMM performances ranks best among the three strategies. Over the period
2004-2018 the Sharpe ratio of all the market timing strategies exceed that of SBH. The
profitability is still the same when the period is split into two halves (2011-2018). The
profitability persists when the trading points determined using the market index are used
to trade five randomly selected securities. This confirms the profitability of trading based
on patterns of historical prices. This negates the principles of EMH Theory but is in
harmony with the FMH Theory, this study, therefore, provides support of FMH Theory
as a more relevant market theory. In Kenya, this study found that investors are averse to
market timing and tend to herd towards buy and hold strategy. Given the low profitability
of the SBH strategy in NSE, this study should provoke the traders in NSE to reconsider
their approach in determining optimal trading points.
Description
Paper presented at the 5th Strathmore International Mathematics Conference (SIMC 2019), 12 - 16 August 2019, Strathmore University, Nairobi, Kenya
Keywords
Fractal Market Hypothesis, Herding behavior, Hidden Markov Model, Market Timing