Discount Rate Changes and Market Timing: A Multinational Study

Su-Jane Chen

and

Ming-Hsiang Chen

This study investigates whether discount rate changes serve as an informative signal for investors to enter or exit the stock market. Based on the signal, a market timing strategy is formulated and its performance relative to a passive buy-and-hold strategy is tested with several performance evaluation methods. Empirical evidence derived from data of seven developed countries over more than 29 years is virtually invariant to the performance measures employed and uniformly supports the superiority of the market timing strategy. However, when the full study period is divided into pre-1994 and post-1993 sub-periods, the dominance of the market timing strategy essentially vanished over the latter sub-sample period. Thus, the tactic of basing investment strategy formulation on discount rate changes has turned unproductive in recent
years. There is actually weak evidence over the post-1993 time period in favor of the passive buy-and-hold strategy.