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It seems there are models that study the market timing ability of funds. Models such as the Treynor-Mazuy and Merton-Henriksson. One can also study the bull beta and compare it to a bear beta.

My problem here is to analyze a series of trade I have made on a stock and be able to say whether or not I had market timing abilities.

The reason, I think, I can't use the models mentioned is because they don't seem to be "trading-oriented". In my opinion, the act of buying and selling can only bias a comparison between the returns of my position and those of the underlying stock. Nor do I think that looking only at the bottom line is a good indication.

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For analyzing a series of trades on a single stock over a period of time. You can understand your market timing contribution by comparing your actual return to the return from consistently holding your average exposure to the stock over that whole period.

To then get a feeling for how much you are contributing compared to how much you are messing with a pure (partial beta) buy-and-hold strategy you can calculate the information ratio. Consistently high information ratios over multiple trades would signal to me that your trading is adding value over the risk I would have by holding your average exposure.

On the portfolio of many stocks quantifying how good you are at timing a particular stock might not be very meaningful unless you have a lot of data from various trades (high frequency trading). It might be easier and more meaningful to measure how good of an active manager you are. In which case information ratio on the whole portfolio would be one of many good measures.

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  • $\begingroup$ In my opinion, the act of buying and selling can only bias a comparison between the returns of my position and those of the underlying stock. -- Is that because of price impact or something else? $\endgroup$ – James Oct 29 '14 at 18:40
  • $\begingroup$ I meant that it feels weird comparing something that can only be long of the same quantity with something which quantity can vary. $\endgroup$ – user1627466 Oct 29 '14 at 19:00
  • $\begingroup$ Come to think of it, I'm not even sure how I can compute my returns. First of all I find them very conditioned on my Initial Equity. Second of all, how should I treat the extra cash I use to buy the stock later in time ? $\endgroup$ – user1627466 Oct 29 '14 at 19:06
  • $\begingroup$ Actually, I just answered a similar question on calculating returns quant.stackexchange.com/questions/15202/… $\endgroup$ – rhaskett Oct 29 '14 at 19:22
  • $\begingroup$ Considering the cash+stock as the full portfolio here would probably be best. Meaning you should probably calculate the return on cash as well though that will be a small adjustment these days. $\endgroup$ – rhaskett Oct 29 '14 at 19:24

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