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UBC Theses and Dissertations

Appraisal of methods used for timing investment decisions in the stock market Rousseau, Alfred Sim

Abstract

The main purpose of this study was to test the worth of using methods of timing investment decisions in the stock market. The writer investigated the use of economic and technical indicators in forecasting the most advantageous times for investing and disinvesting in the stock market. Recognition was given to the importance of fundamental analysis in the choice of stocks, and the "balance of the appraisal was devoted to the timing decision, or, "when to "buy?". A null hypothesis was formed to provide the basis for a test on the timing decision. The hypothesis was tested by the use of a model, consisting of economic and technical indicators, and criteria that are developed for the performance of the model. The statistical method in this appraisal comprises of the formation of indexes for forecasting the investment decisions. Some of the leading economic indicators that were developed by the National Bureau of Economic Research, and the Index of Consumer Sentiment of the University of Michigan were formed into a diffusion index, which was tested for the purpose of assigning a weight to its performance. A group of eight currently used technical indicators were then individually tested for their effectiveness in a market forecast. Of these, six were found suitable, and were then incorporated into a composite index. The composite index was then tested for the purpose of assigning a weight to its performance. On the basis of their weighting, the diffusion index and the composite index were then incorporated into the model. By means of tests, suitable criteria were developed for the performance of the model. The model was then used to test the null hypothesis that was formed for this appraisal. The results indicated that there was a significant difference between a buy and hold investment decision, and one that was timed to the indications of the chosen economic and technical indicators.

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