Can Market Timing Improve Portfolio Performance? Evidence from the Chinese Stock Market

This paper proposes a novel market timing-based portfolio strategy that minimizes the variance of differences between target portfolio returns and market returns adjusted via a market timing mechanism. This mechanism is derived from the Henriksson and Merton model and the Treynor and Mazuy model. We construct the market timing-based portfolio model and find that the derived optimal portfolio comprises a risk-free asset, a tangency portfolio, and a portfolio with market timing that can capture market timing-driven returns. Using the Chinese stock market data, we confirm that the optimal portfolio delivers superior Sharpe ratios than the equally-weighted portfolio, market factor tracking portfolio, and minimum variance portfolio after accounting for transaction costs. The superior performance of the proposed strategy can be attributed to its enhanced upside and downside participation achieved through market timing.