This paper addresses the bias associated with parametric measurement of timing skill based on monthly timer returns when timers can make daily timing decisions. Simulations suggest that the classic Henriksson-Merton parametric measure of timing skill is weak and biased downward when applied to the monthly returns of a daily timer. The paper proposes an adjustment that mitigates this problem without the need to collect daily timer returns. Four tests of timing skill, carried out on a sample of 558 mutual funds, show that very few funds exhibit statistically significant timing skill. More encompassing, the adjusted-FF3 test (based on the specification that incorporates both the proposed adjustment and the Fama-French three-factor model) is the least biased measure of timing skill among the four it provides for a sharper inference regarding timing skill and helps mitigate biases associated with the choice of investment style.
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Volume (Year): 35 (2000) Issue (Month): 03 (September) Pages: 257-290 Download reference. The following formats are available: HTML
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Swinkels, L. & Sluis, P.J. van der & Verbeek, M.J.C.M., 2003.
"Market timing: A decomposition of mutual fund returns,"
Research Paper
ERS-2003-074-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
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