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Imperfect predictability and mutual fund dynamics. How managers use predictors in changing systematic risk

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  • Amisano, Gianni
  • Savona, Roberto

Abstract

Suppose a fund manager uses predictors in changing port-folio allocations over time. How does predictability translate into portfolio decisions? To answer this question we derive a new model within the Bayesian framework, where managers are assumed to modulate the systematic risk in part by observing how the benchmark returns are related to some set of imperfect predictors, and in part on the basis of their own information set. In this portfolio allocation process, managers concern themselves with the potential benefits arising from the market timing generated by benchmark predictors and by private information. In doing this, we impose a structure on fund returns, betas, and bench-mark returns that help to analyse how managers really use predictors in changing investments over time. The main findings of our empirical work are that beta dynamics are significantly affected by economic variables, even though managers do not care about bench-mark sensitivities towards the predictors in choosing their instrument exposure, and that persistence and leverage effects play a key role as well. Conditional market timing is virtually absent, if not negative, over the period 1990-2005. However such anomalous negative timing ability is offset by the leverage effect, which in turn leads to an increase in mutual fund extra performance. JEL Classification: C11, C13, G12, G13

Suggested Citation

  • Amisano, Gianni & Savona, Roberto, 2008. "Imperfect predictability and mutual fund dynamics. How managers use predictors in changing systematic risk," Working Paper Series 881, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2008881
    Note: 337895
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    Cited by:

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    2. Del Boca, Alessandra & Fratianni, Michele & Spinelli, Franco & Trecroci, Carmine, 2010. "The Phillips curve and the Italian lira, 1861-1998," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 182-197, August.
    3. Alessandro Fedele & Raffaele Miniaci, 2010. "Do Social Enterprises Finance Their Investments Differently from For-profit Firms? The Case of Social Residential Services in Italy," Journal of Social Entrepreneurship, Taylor & Francis Journals, vol. 1(2), pages 174-189, October.
    4. Alessandro Fedele & Francesco Liucci & Andrea Mantovani, 2009. "Credit availability in the crisis: the European investment bank group," Working Papers 0913, University of Brescia, Department of Economics.
    5. Martin Meier & Enrico Minelli & Herakles Polemarchakis, 2014. "Competitive markets with private information on both sides," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(2), pages 257-280, February.
    6. Monica Billio & Roberto Casarin, 2010. "Bayesian Estimation of Stochastic-Transition Markov-Switching Models for Business Cycle Analysis," Working Papers 1002, University of Brescia, Department of Economics.
    7. Francesco Menoncin & Paolo Panteghini, 2009. "Retrospective Capital Gains taxation in the real world," Working Papers 0910, University of Brescia, Department of Economics.
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    9. Bisin, A. & Geanakoplos, J.D. & Gottardi, P. & Minelli, E. & Polemarchakis, H., 2011. "Markets and contracts," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 279-288.

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    More about this item

    Keywords

    Bayesian analysis.; conditional asset pricing models; Equity mutual funds; time-varying beta;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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