I've never understood the point of these papers, other than to give professors something to get published. What does this prove? It's no shock that if you miss the best days in the market, you will make less money than if you were in. These studies always discount the benefit one would get from missing the big down days. So lets say one could predict with absolute certainity that the market was going to have a large move on a day - you just can't be sure in which direction. Would it pay off to take your money off the table for the day?
A more fair comparison would be to see how one would do if you missed both the ten best AND worst days in the market. I only have sp500 daily data going back to Nov 5, 1984, but the sp500 returned about 12% annually over that time. The Indexed Price (start = 100) of the SP500 on 12/31/1993 would be 276.69.
Assuming one had the power to miss both the top 10 highest percentage moves UP and DOWN, one would finish with an indexed price of 374.23. This is an annualized return north of 15.75%. And if I were do assume the opposite of the study (that one could miss the top 10 down days, which is just as unlikely as only missing the top 10 up days) your returns would be even more spectualar.
I think this illustrates the problem with Seyhun's study: When you are looking for a result in academic finance, you are likely to find it. It just doesn't mean it has value.
(If you'd like the data, email me.)
Commenting by HaloScan
