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Time-Varying Fund Manager Skill

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Author Info

  • Kacperczyk, Marcin
  • van Nieuwerburgh, Stijn
  • Veldkamp, Laura

Abstract

How to evaluate a fund manager’s skill is a central question in empirical finance. Prior literature has defined skill as an ability to either pick stocks or time the market, at all times. We propose a new definition of skill as a general cognitive ability used in different ways at different times. We find evidence for stock picking in booms and for market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new metric of managerial ability that can be constructed in real time and can predict fund performance. The metric gives more weight to a fund’s market timing in recessions and to a fund’s stock picking in booms, and it displays far more persistence than either market timing or stock picking alone.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9025.

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Date of creation: Jul 2012
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Handle: RePEc:cpr:ceprdp:9025

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Keywords: BUSINESS CYCLE; MUTUAL FUNDS; SKILLS;

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References

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  1. Luboš Pástor & Robert F. Stambaugh, . "Investing in Equity Mutual Funds," CRSP working papers 532, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Marcin Kacperczyk & Amit Seru, 2007. "Fund Manager Use of Public Information: New Evidence on Managerial Skills," Journal of Finance, American Finance Association, vol. 62(2), pages 485-528, 04.
  3. Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2011. "Risk Shifting and Mutual Fund Performance," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2575-2616.
  4. Marcin Kacperczyk & Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Rational Attention Allocation Over the Business Cycle," NBER Working Papers 15450, National Bureau of Economic Research, Inc.
  5. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2004. "On the Industry Concentration of Actively Managed Equity Mutual Funds," NBER Working Papers 10770, National Bureau of Economic Research, Inc.
  6. Glode, Vincent, 2011. "Why mutual funds "underperform"," Journal of Financial Economics, Elsevier, vol. 99(3), pages 546-559, March.
  7. Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
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Citations

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Cited by:
  1. Fabian Irek & Thorsten Lehnert, 2013. "Do Fund Investors Know that Risk is Sometimes not Priced?," CREA Discussion Paper Series 13-1, Center for Research in Economic Analysis, University of Luxembourg.
  2. Angelidis, Timotheos & Giamouridis, Daniel & Tessaromatis, Nikolaos, 2012. "Revisiting Mutual Fund Performance Evaluation," MPRA Paper 36644, University Library of Munich, Germany.
  3. Ling, Leng & Arias, J.J., 2013. "Mutual fund flows and window-dressing," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(4), pages 440-449.
  4. Hao Jiang & Michela Verardo, . "Does herding behavior reveal skill? An analysis of mutual fund performance," FMG Discussion Papers dp720, Financial Markets Group.
  5. Fabian Irek & Thorsten Lehnert, 2013. "Do Fund Investors Know that Risk is Sometimes not Priced?," LSF Research Working Paper Series 13-1, Luxembourg School of Finance, University of Luxembourg.

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