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Market Timing, Selectivity, and Mutual Fund Performance: An Empirical Investigation

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  • Lee, Cheng Few
  • Rahman, Shafiqur
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    Abstract

    This article empirically examines market timing and selectivity performance of a sample of mutual funds. It uses a very simple regression technique to separate stock selection ability from timing ability. This technique, first suggested by Treynor and Mazuy and later refined by Bhattacharya and Pfleiderer, uses a modified security-market line approach to produce individual measures of timing and stock selection ability. The inputs to the model are only the returns earned on the fund and those earned on the market portfolio. The empirical results indicate that at the individual fund level there is some evidence of superior micro- and macroforecasting ability on the part of the fund manager. Copyright 1990 by the University of Chicago.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 63 (1990)
    Issue (Month): 2 (April)
    Pages: 261-78

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    Handle: RePEc:ucp:jnlbus:v:63:y:1990:i:2:p:261-78

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Meredith Beechey & David Gruen & James Vickery, 2000. "The Efficient Market Hypothesis: A Survey," RBA Research Discussion Papers, Reserve Bank of Australia rdp2000-01, Reserve Bank of Australia.
    2. Lo, Andrew W. (Andrew Wen-Chuan) & MacKinlay, Archie Craig, 1955-, 1992. "Maximizing predictability in the stock and bond markets," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 3450-92., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Volkman, David A. & Wohar, Mark E., 1996. "Abnormal profits and relative strength in mutual fund returns," Review of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 101-116.
    4. Chacko, George & Das, Sanjiv Ranjan, 1999. "A theory of optimal timing and selectivity," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 23(7), pages 929-965, June.
    5. Romacho, Joao Carlos & Cortez, Maria Ceu, 2006. "Timing and selectivity in Portuguese mutual fund performance," Research in International Business and Finance, Elsevier, Elsevier, vol. 20(3), pages 348-368, September.
    6. Cuthbertson, Keith & Nitzsche, Dirk, 2013. "Performance, stock selection and market timing of the German equity mutual fund industry," Journal of Empirical Finance, Elsevier, Elsevier, vol. 21(C), pages 86-101.
    7. Tezel, Ahmet & McManus, Ginette, 2001. "Evaluating a stock market timing strategy: the case of RTE Asset Management," Financial Services Review, Elsevier, Elsevier, vol. 10(1-4), pages 173-186.
    8. Bangassa, Kenbata & Su, Chen & Joseph, Nathan L., 2012. "Selectivity and timing performance of UK investment trusts," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 22(5), pages 1149-1175.
    9. Su-Jane Chen & Ming-Hsiang Chen, 2009. "Discount Rate Changes and Market Timing: A Multinational Study," Annals of Economics and Finance, Society for AEF, vol. 10(2), pages 329-349, November.
    10. Holmes, Kathryn A. & Faff, Robert, 2008. "Estimating the performance attributes of Australian multi-sector managed funds within a dynamic Kalman filter framework," International Review of Financial Analysis, Elsevier, Elsevier, vol. 17(5), pages 998-1011, December.
    11. Benson, Karen L. & Faff, Robert W., 2003. "A performance analysis of Australian international equity trusts," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 13(1), pages 69-84, February.
    12. Pin-Huang Chou & Robert P. Parks, 1993. "A Further Re-Examination of the Contrarian Investment Strategy: Evidence from Multivariate Tests," Finance, EconWPA 9307001, EconWPA, revised 25 Jul 1993.
    13. Friesen, Geoffrey C. & Sapp, Travis R.A., 2007. "Mutual fund flows and investor returns: An empirical examination of fund investor timing ability," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(9), pages 2796-2816, September.
    14. Patro, Dilip Kumar, 2001. "Measuring performance of international closed-end funds," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(9), pages 1741-1767, September.
    15. Chen, Li-Wen & Adams, Andrew & Taffler, Richard, 2013. "What style-timing skills do mutual fund “stars” possess?," Journal of Empirical Finance, Elsevier, Elsevier, vol. 21(C), pages 156-173.
    16. Prather, Laurie & Bertin, William J., 1998. "The implication of discount rate changes for market timing," Review of Financial Economics, Elsevier, Elsevier, vol. 7(1), pages 21-33.
    17. Li-Wen Chen & Andrew Adams & Richard Taffler, 2010. "What Style-Timing Skills do Mutual Fund “Stars†Possess?," CFI Discussion Papers, Centre for Finance and Investment, Heriot Watt University 1001, Centre for Finance and Investment, Heriot Watt University.
    18. Michael E. Drew & Madhu Veeraraghavan & Vanessa Wilson, 2002. "Market Timing and Selectivity: Evidence from Australian Equity Superannuation Funds," School of Economics and Finance Discussion Papers and Working Papers Series, School of Economics and Finance, Queensland University of Technology 105, School of Economics and Finance, Queensland University of Technology.
    19. Chance, Don M. & Hemler, Michael L., 2001. "The performance of professional market timers: daily evidence from executed strategies," Journal of Financial Economics, Elsevier, Elsevier, vol. 62(2), pages 377-411, November.

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