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Optimal Timing in Trading Japanese Equity Mutual Funds: Theory and Evidence

  • Tanaka, Hiroatsu

    (U Tokyo)

  • Baba, Naohiko

    (Bank of Japan)

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    This paper provides both theoretical and empirical analyses of market participants' optimal decision-making in trading Japanese equity mutual funds. First, we build an intertemporal decision-making model under uncertainty in the presence of transaction costs. This setting enables us to shed light on the investors' option to delay investment. A comparative analysis shows that an increase in uncertainty over the expected rate of return on mutual funds has a negative impact not only on market participants' buying behavior but also on their selling behavior. In addition, a several percent increase in front-end loads and redemption fees is likely to change the optimal holding ratio of mutual funds in investors' portfolios, by up to 10 percent. Second, we empirically examine the theoretical implications using daily transaction data of selected equity mutual funds in Japan. By estimating a panel data model, we conclude that for the sample period, from August 2000 to July 2001, investment behavior has been rational in light of our theoretical model. Our results suggest that investors are likely to rationally postpone their purchases of equity mutual funds under the present circumstances of low expected returns, high degree of uncertainty, and high trading costs.

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    File URL: http://www.imes.boj.or.jp/research/papers/english/me22-1-4.pdf
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    Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

    Volume (Year): 22 (2004)
    Issue (Month): 1 (March)
    Pages: 91-121

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    Handle: RePEc:ime:imemes:v:22:y:2004:i:1:p:91-121
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    1. Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
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    8. Chordia, Tarun, 1996. "The structure of mutual fund charges," Journal of Financial Economics, Elsevier, vol. 41(1), pages 3-39, May.
    9. Susan E. K. Christoffersen, 2001. "Why Do Money Fund Managers Voluntarily Waive Their Fees?," Journal of Finance, American Finance Association, vol. 56(3), pages 1117-1140, 06.
    10. Eli M. Remolona & Paul Kleiman & Debbie Gruenstein, 1997. "Market returns and mutual fund flows," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 33-52.
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