Conditional Market Timing with Benchmark Investors

Abstract

This paper tests models of mutual fund market timing that allow the manager's payo! function to depend on returns in excess of a benchmark, and distinguish timing based on publicly available information from timing based on "ner information. We simultaneously estimate parameters which describe the public information environment, the manager's risk aversion, and the precision of the fund's market-timing signal. Using a sample of more than 400 U.S. mutual funds for 1976}94, our "ndings suggest that mutual funds behave as highly risk averse, benchmark investors. Conditioning on public information improves the model speci"cation. After controlling for the public 0304-405X/99/$ -see front matter 1999 Elsevier Science S.A. All rights reserved. PII: S 0 3 0 4 -4 0 5 X ( 9 9 ) 0 0 0 0 6 -9 information, we "nd no evidence that funds have signi"cant market-timing ability.1999 Elsevier Science S.A. All rights reserved.JEL classi"cation: D82; G11; G12; G14; G23

Winners and losers: German equity mutual funds

“…Successful market timing involves fund managers increasing (decreasing) their fund's market-beta in anticipation of an increase (decrease) in market returns. Evidence for successful market timing in both parametric and nonparametric studies has been found (for the US see for example, Treynor and Mazuy 1966, Henriksson and Merton 1981, Ferson and Schadt 1996, Busse 1999, Becker et al 1999 There has been little work done on analysing the performance of the German mutual fund industry, in particular regarding the market timing ability of fund managers. Although the German mutual fund industry is small compared to the US, it has seen substantial growth over the last 15 to 20 years and its assets under management peaked in 2007 at $372bn, but then dropped to $237bn at end of 2008.…”

The Dynamics of Mutual Funds and Market Timing Measurement

“…Information on portfolio holdings can be used instead (e.g., Grinblatt and Titman, 1989a), but such information is less accessible than data on returns. On the other hand, using the same approach, Ferson and Warther (1996) and Becker et al (1999) find no evidence of timing at all. Generally, in this context, the previous literature compares mutual fund and market returns, in upward and downward periods, by including a model that explains how the returns from the fund are generated and how the timing decisions are incorporated.…”

“…The ideal situation would be to analyze managers' timing decisions (e.g., Chance and Hemler, 2001). Treynor and Mazuy (1966), Grinblatt and Titman (1989b), Coggin et al (1993), Wenchi-Kao et al (1998), Volkman (1999), Edelen (1999), Becker et al (1999), Patro (2001), Fung et al (2002), Cesari and Panetta (2002), Jiang (2003) and Holmes and Faff (2004) find no evidence of timing in general but, in some cases, find perverse timing. Information on portfolio holdings can be used instead (e.g., Grinblatt and Titman, 1989a), but such information is less accessible than data on returns.…”

A Thought or Two for Mutual Funds

“…Many studies find little evidence of timing ability (e.g., Becker et al [1999]; Daniel et al [1997]; Titman [1989a,b, 1994]; Treynor and Mazuy [1966]). …”