The myth of business cycle sector rotation

Conventional wisdom suggests that sectors/industries provide systematic performance and that business cycle rotation strategies generate excess market performance. However, we find no evidence of systematic sector performance where popular belief anticipates it will occur. At best, conventional sector rotation generates modest outperformance, which quickly diminishes after allowing for transaction costs and incorrectly timing the business cycle. The results are robust to alternative sector and business cycle definitions. We find that relaxing sector rotation assumptions and letting any industry excess return predict future returns of other industries results in predictability not significantly different than what would be expected by random chance.

Keywords

business cycle, industry investments, investments, market efficiency, return predictability, sector rotation

Citation

Molchanov A, Stangl J. (2023). The myth of business cycle sector rotation. International Journal of Finance and Economics. Early View. (pp. 1-24).

URI

https://mro.massey.ac.nz/handle/10179/69590

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