The Dynamics of Mutual Funds and Market Timing Measurement
AbstractNonlinearity in the relationship between mutual funds and market returns is often assumed when market timing is assessed. Hence, a quadratic term is introduced into the classic linear model to measure market timing. However, nonlinearity could be due to other factors and the evidence of market timing, usually negative in the literature, may therefore be biased. In this context, the aim of this paper is to analyze the effect of time-varying beta risk and benchmark omission when measuring market timing ability in mutual funds. The first part of the paper shows how the existence of time-varying beta risk produces artificial evidence of market timing, especially when considering asymmetries. In the second part, Kalman filtering is used to estimate the time-varying beta for mutual funds and market timing is then assessed. In general, changes in risk are not related to up and down markets, although some funds show a negative relation between beta variation and market sign. Evidence of negative market timing may be inferred from this result. The results are sensitive to two outliers, corresponding to the launch of the Euro in European financial markets and 9-11. However, passive benchmarks with asset weights different from those of the benchmark also give rise to this result. After these omitted benchmarks have been introduced, any previous evidence of negative market timing disappears almost completely. These results hold when mutual fund net cash flows are controlled for. Therefore, time-varying beta risk and benchmark omission could produce a spurious relationship between the variation of portfolio risk and markets which, in the absence of information about timing decisions, could lead us to infer evidence of market timing mistakenly.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.
Volume (Year): 12 (2008)
Issue (Month): 4 (December)
Contact details of provider:
Web page: http://www.degruyter.com
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Caporin, Massimiliano & Lisi, Francesco, 2013. "A Conditional Single Index model with Local Covariates for detecting and evaluating active portfolio management," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 236-249.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.