Time-Varying Fund Manager Skill
AbstractHow 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 InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9025.
Date of creation: Jul 2012
Date of revision:
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Other versions of this item:
- G00 - Financial Economics - - General - - - General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G2 - Financial Economics - - Financial Institutions and Services
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-14 (All new papers)
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