Optimal Timing in Trading Japanese Equity Mutual Funds: Theory and Evidence
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.
Volume (Year): 22 (2004)
Issue (Month): 1 (March)
|Contact details of provider:|| Postal: 2-1-1 Nihonbashi, Hongoku-cho, Chuo-ku, Tokyo 103|
Web page: http://www.imes.boj.or.jp/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chordia, Tarun, 1996. "The structure of mutual fund charges," Journal of Financial Economics, Elsevier, vol. 41(1), pages 3-39, May.
- 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.
- Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
- Judith A. Chevalier & Glenn D. Ellison, 1995.
"Risk Taking by Mutual Funds as a Response to Incentives,"
NBER Working Papers
5234, National Bureau of Economic Research, Inc.
- Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
- Chevalier, J. & Ellison, G., 1996. "Risk Taking by Mutual Funds as a Response to Incentives," Working papers 96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
- Lu Zheng, 1999. "Is Money Smart? A Study of Mutual Fund Investors' Fund Selection Ability," Journal of Finance, American Finance Association, vol. 54(3), pages 901-933, 06.
- Lawrence R. Glosten & Paul R. Milgrom, 1983.
"Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders,"
570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
- Brown, Stephen J, et al, 2001.
"The Japanese Open-End Fund Puzzle,"
The Journal of Business,
University of Chicago Press, vol. 74(1), pages 59-77, January.
- Stephen J. Brown & William N. Goetzmann & Takato Hiraki & Toshiyuki Otsuki & Noriyoshi Shiraishi, 1998. "The Japanese Open-End Fund Puzzle," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-012, New York University, Leonard N. Stern School of Business-.
- Stephen J. Brown & William N. Goetzmann & Takato Hiraki & Toshiyuki Otsuki & Noriyoshi Shiraishi, 1998. "The Japanese Open-End Fund Puzzle," NBER Working Papers 6347, National Bureau of Economic Research, Inc.
- 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.
- Cai, Jun & Chan, K C & Yamada, Takeshi, 1997. "The Performance of Japanese Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 237-273.
- Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
- Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
- Constantinides, George M, 1986.
"Capital Market Equilibrium with Transaction Costs,"
Journal of Political Economy,
University of Chicago Press, vol. 94(4), pages 842-862, August.
- Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
When requesting a correction, please mention this item's handle: RePEc:ime:imemes:v:22:y:2004:i:1:p:91-121. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken)
If references are entirely missing, you can add them using this form.