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Ability parity model for optimal fund allocation: Evidence from China's mutual fund markets

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Listed:
  • Liu, Weiyi
  • Liu, Yangyi
  • Luo, Ronghua
  • Ding, Yue

Abstract

We propose in this article a novel ability parity model for optimal fund allocation. Compared with the traditional portfolio selection methods which directly work on asset returns and/or risk (volatility), the proposed ability parity method focuses mainly on the allocation between the stock selection ability and market timing ability of fund managers, which essentially determines fund performance (Fama, 1972). Using the data of China's mutual fund markets, we find strong and robust evidence that the proposed ability parity model delivers significantly higher return, skewness, and Sharpe ratio than traditional models and the benchmark index, while having volatilities comparable with traditional models.

Suggested Citation

  • Liu, Weiyi & Liu, Yangyi & Luo, Ronghua & Ding, Yue, 2021. "Ability parity model for optimal fund allocation: Evidence from China's mutual fund markets," Emerging Markets Review, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:ememar:v:48:y:2021:i:c:s1566014121000121
    DOI: 10.1016/j.ememar.2021.100804
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    References listed on IDEAS

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    More about this item

    Keywords

    Ability parity; Stock selection ability; Market timing ability;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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