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The Performance of Professional Market Timers: Daily Evidence from Executed Strategies

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Abstract

We examine the performance of 30 professional market timers during 1986–1994. Prior studies have analyzed implicit recommendations from mutual fund returns or explicit recommendations from newsletters. We analyze explicit recommendations executed in customer accounts. Using four tests, three benchmark portfolios, and daily data, we find significant unconditional and conditional ability that is robust with respect to transaction costs and survivorship bias. Relative ability persists and varies with the frequency of recommendation changes. When recommendations of successful timers are observed monthly instead of daily, significant ability generally disappears. Hence, the frequency with which recommendations are observed can change inferences regarding ability.

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... (2007) ve Kim ve Sohn (2013) ise çalışmaları kapsamında değerlendirdikleri fonların piyasa zamanlaması yeteneğine sahip olduğunu tespit etmişlerdir. Bollen ve Busse (2001) ve Chance ve Hemler (2001), çalışmaları kapsamında değerlendirdikleri fonların aylık getirileri yerine günlük getirilerinin kullanıldığında zamanlama yeteneğine sahip olduğu sonucuna ulaşmıştır. Karacabey (1999), Akel (2007) ve Şahin (2017) farklı zaman aralıklarında Türkiye' de işlem gören pay senedi yoğun yatırım fonlarının piyasa zamanlaması performansını incelemişler ve fon yöneticilerinin piyasa zamanlaması yeteneğine sahip olmadığı sonucuna ulaşmışlardır. ...
... Bu nedenle, piyasa zamanlaması modellerinde de günlük frekansta veri kullanılması durumda piyasa endeksinin gecikmeli değerlerinin modele eklenerek düzeltme yapılması gerekmektedir (Christopherson, David ve Ferson, 2009, s.75). Bollen ve Busse (2001) ve Chance ve Hemler (2001) hariç fonların piyasa zamanlaması performansına yönelik gerçekleştirilen öncü çalışmalarda, değişkenlere ait getiriler genellikle aylık frekansta ele alınmıştır. Gerçekleştirilen bu çalışma, fonların klasik modeller yardımıyla piyasa zamanlaması performansının ölçülmesinin yanı sıra volatilite zamanlaması performansı, farklı piyasa koşulları altındaki piyasa zamanlaması performansı ve uygulanan aktif ya da pasif stratejilerin zamanlama performansına etkilerini incelemeyi amaçlamaktadır. ...
... Bu noktada; farklı veri sıklıklarına uygun modellerin kullanılması ile piyasa zamanlaması olgusunun farklı teorik perspektif çerçevesinde incelenmesi faydalı olacaktır. Bollen ve Busse (2001) ve Chance ve Hemler (2001)'in önermiş olduğu modeller doğrultusunda günlük veriler kullanılarak, yöneticilerin mikro ölçekte uygulamış oldukları stratejilere ve bu stratejilerin fon performansına ilişkin önemli bilgiler elde edileceği düşünülmektedir. Bu noktada, günlük getirilerin analiz edilebildiği modellerin gelecek çalışmalarda ele alınmasının, ulusal literatüre önemli katkılarının olacağı düşünülmektedir. ...
... First, as a mismatch between the frequency of informed trading and the frequency of timing measurement is potentially problematic (Goetzmann et al., 2000, Chance andHemler, 2001), we consider three different classes of informed managers (daily, occasional and monthly timers) as well as daily and monthly timing and global performance measurements. In our setup, the daily timers receive signals every day on future returns, the occasional timers receive similar signals twice per month on random days, and the monthly timers receive signals every month. ...
... While performance studies using monthly data are widespread, there is relatively little evidence on the impact of using daily data. Bollen and Busse (2001) and Chance and Hemler (2001) examine the market timing ability of equity funds and argue that the daily performance measures produce estimates that are more precise than their monthly counterparts, with a greater number of funds with positive evaluation. Bollen and Busse (2004) furthermore show that 3 detecting persistence in the best equity funds is possible when they are evaluated with daily data. ...
... Overall, these findings expand on the analysis of Goetzmann et al. (2000), which focuses only on the monthly measurement of daily timers. They also revisit the conclusion of Bollen and Busse (2001) and Chance and Hemler (2001) on the benefits of using daily instead of monthly 7 data, as we show that the frequency of informed trading could be crucial in evaluating these benefits. They add to the analytical results of Lehmann and Timmermann (2007) on the difficulty of separating market timing ability from total performance, and to the methodological exploration of Chen et al. (2010), who investigate the effects of assets with nonlinearities, interim trading, public information and stale pricing in the context of timing in bond mutual funds. ...
Article
Using simulations controlling for the ability to time the equity, bond, and money markets, we compare daily and monthly performance measures. Our main results highlight the joint importance of the fictitious timer’s trading frequency and the data sampling frequency for estimation. Specifically, daily timing measures are superior to those estimated monthly for daily timers, but inferior for occasional or monthly timers. Global measures show more robustness to differences in trading and data sampling frequencies. Finally, conditional measures do not improve upon unconditional ones, and results are similar for performance detection versus ranking.
... Moreover, Bollen and Busse (2001) demonstrate that the market timing skill of funds exists and is more accurately estimated by high frequency returns. In addition to the return-based analysis, some studies use non-return data such as fund holdings, and cash flow data to do the market timing analysis (see, for example, Chance and Hemler (2001), Jiang et al. (2007), and Friesen and Sapp (2007)). ...
... Finally, Friesen and Sapp (2007) use cash flow data. Evidence on successful style timing studies is mixed, withBollen and Busse (2001),Chance and Hemler (2001) andJiang et al. (2007) showing successful market timers do exist, whilstFriesen and Sapp (2007) do not find any evidence of market timing skills. Non-return data is often hard to get and usually only available in low frequency. ...
Article
We study the mutual fund performance for about 45 years. There are several key points that we can withdraw from this dissertation. First, to study the persistence of mutual fund performance, it is important to consider time-varying exposures because when they are ignored, the persistence will be overestimated or underestimated. Second, the popular investment strategy in literature is to use only past performance to select mutual funds. We find that an investor can select superior funds by additionally using fund characteristics (fund turnover ratio and ability). Importantly, this strategy also requires less turnover, which is more appealing from the economic point of view. Third, the average alpha of mutual funds is an indication of whether it pays off to invest in actively managed funds. We show that a substantial part of the variation in the average alpha can be explained by the average expense ratio, the ratio between skilled and unskilled funds, and combining the average turnover ratio with the skill ratio and trading costs. The latter demonstrates that average turnover hurts the average funds performance due to there not being enough skilled funds. Fourth, selecting mutual funds on only alpha or a single style timing skill leads to overestimating the loading on the selected characteristic and a negative bias towards other characteristics. By estimating for each fund simultaneously alpha and style timing skills over its complete ex-ante available history based on daily returns we achieve two important results, namely the estimated alphas and style timing loadings of the top decile are estimated more accurately; and the ex-post performance of the top decile is superior to that of deciles selected on a subset of characteristics, using monthly data or a shorter estimation window.
... All of the above strategies are "active alpha" strategies in that they have positive (in most cases statistically significant) alphas and very low betas with respect to the market index. All of the strategies time the major downturn of 2000-2003 successfully and make frequent small moves, a characteristic of successful market timing strategies noted in Chance and Helmer (2001). In contrast, timing strategies based on business cycle variables 7 react to the major downturn well after it has passed and also make sudden moves in and out of the market. ...
... The timing strategies considered above are able to time market downturns and also make frequent smaller moves in and out of the market, a characteristic of successful market timing strategies, as noted by Chance and Helmer (2001). In contrast the index weights of strategies based on business cycle variables such as the short rate, term spread and credit spread are unable to respond to the major downturn in 2001 until well after it had begun and tended to maintain their long or short position for a while and then make sudden sharp moves (details available on request), leading to all of them having negative Sharpe ratios over this period. ...
Article
In this paper we study the economic value of predicting the equity risk premium using market variables that reflect the positions of traders in futures and derivatives market. The economic value is ascertained by studying the performance of market timing strategies that use the positions of commercial hedgers and small speculators as predictive variables. Our market timing strategies have high positive Sharpe ratios over the 1999-2007 period compared to a Sharpe ratio of almost zero for the market index. They avoid losses during major downturns and have significant positive alphas, in contrast to timing strategies based on business cycle variables which under-perform the index over this period. The predictive ability seems to originate from a response to changes in fundamentals ahead of the market for large hedgers and from herding among small speculators. Overall these results indicate that futures market variables could play an important and economically significant role in predicting the equity risk premium.
... All of the above strategies are "active alpha" in that they have positive, mostly significant, alphas and very low betas with respect to the market index. All of the strategies time the major downturn successfully and make frequent small moves, a characteristic of successful market timing strategies noted in Chance and Helmer (2001). In contrast timing strategies based on business cycle variables react to the major downturn well after it has passed and also make sudden moves in and out of the market. ...
... The timing strategies considered above are able to time market downturns and also make frequent smaller moves in and out of the market, a characteristic of successful market timing strategies, as noted by Chance and Helmer (2001). In contrast the index weights of strategies based on business cycle variables such as the short rate, term spread and credit spread are unable to respond to the major downturn in 2001 until well after it had begun and tended to maintain their long or short position for a while and then make sudden sharp moves (details available on request), leading to all of them having negative Sharpe ratios over this period. ...
Article
In this paper we study the economic value of predicting the equity risk premium using market variables that reflect the positions of traders in futures and derivatives market. The economic value is ascertained by studying the performance of market timing strategies that use the positions of commercial hedgers and small speculators as predictive variables. Our market timing strategies have high positive Sharpe ratios over the 1999-2007 period compared to a Sharpe ratio of almost zero for the market index. They avoid losses during major downturns and have significant positive alphas, in contrast to timing strategies based on business cycle variables which under-perform the index over this period. The predictive ability seems to originate from a delayed response to changes in fundamentals for large speculators and from herding among small investors. Overall these results indicate that market variables could play an important and economically significant role in predicting the equity risk premium.
... 3 Two exceptions are Graham and Harvey [1996] and Chance and Hemler [2001]. The former examine investment newsletters and find poor performance among market prognosticators. ...
... Second, given that a manager can make a switch on any given day, it is important to evaluate performance on a daily basis. The aforementioned Chance and Hemler [2001] study finds that a group of managers showed ability when evaluated on a daily basis but not on a monthly basis. Clearly, if a manager receives a signal suggesting an adjustment to his allocation, that signal is based on contemporaneous information. ...
... For example, the BDS test statistics (Brock, Dechert, Scheinkman and LeBaron, 1996) used as a portmanteau test for neglected nonlinearity, also has a form of a pivotized contrast, but the components of this contrast are Wilcoxon-type averages rather than simple averages. Sometimes literature suggests using even more complicated statistics like the Spearman rank correlation coefficient as in Chance and Hemler (2001), or a certain U-statistic as in Jiang (2003). It is possible that such tests may also be outcomes of some estimators in linear regressions, but those estimators do not take a form of a function of simple empirical averages but rather take some fancier forms. ...
Article
We show that many existing tests for time-series predictability are special cases of a general nonparametric test based on the OLS estimator of the slope coefficient in a bivariate linear regression of certain type. By manipulating the features of this regression one can construct numerous new predictability tests. It turns out that some of the tests existing in the literature are asymptotically equivalent, and differ only by what kind of pivotization is applied to the core statistic. In addition, we show that the same tests may be constructed via reverse regressions. We also provide an extension to multiple null hypotheses and, respectively, tests based on multiple regressions. Among other things, we pay special attention to the issue of correct pivotization, discuss interpretation of regression-based tests, and argue against some widespread misconceptions.
... 4. Specifically, November's consumer price index will be available at the end of December. 5. Following Chance and Hemler's (2001) argument that higher frequency data yield more significant results than lower frequency data, but recognising that the frequency of tactical asset allocation is constrained by expense, time and information requirements, the study employs monthly data to test the IAPE metric. See also Tezel and McManus (2001: 175 ...
Article
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Asset allocation plays a central role in determining investment outcomes, and available evidence shows that portfolio results can be enhanced through tactical asset allocation if managers use the simple price-earnings ratio as a predictor of equity returns. Recently, some international evidence has emerged which shows that, by augmenting the price-earnings metric with information about consumer price inflation, further enhancements can be achieved in tactical asset allocation. This study reviews these arguments as they apply to South Africa, and finds that an inflation-augmented price-earnings ratio is more successful in forecasting equity returns than is the simple price-earnings ratio. Moreover, the metric is found to be significant in explaining relative asset class returns. On a risk-adjusted basis, however, the tool fails to improve the portfolio results when compared to a buy-and-hold strategy. <br /
... They found evidence of market timing ability in a significant number of funds in their sample using daily data. Chance and Helmer (2001) used daily data to track the allocation strategies of 30 professional fund market timers and found a significant number of market timers. Furthermore, according to Goetzmann, Ingersoll and Ivković (2000), a monthly frequency might fail to capture the contribution of a manager's timing activities to fund returns, because decisions regarding market exposure are made more frequently than monthly for most of the funds (Sehgal, 2008). ...
Article
It is expected that the returns and resistance of Islamic mutual funds will be different from conventional mutual funds as the former have limited choices for portfolio diversification. This article analyses the performance of conventional and Islamic unit trusts for the period February 1995 to July 2012 in the Malaysian market, one of the most developed Islamic mutual fund markets. The performance analysis is based on four parameters: (i) risk-adjusted returns of unit trusts; (ii) market timing abilities; (iii) selection performance; and (iv) persistence. The results of this study suggest that the returns of both conventional and Islamic unit trusts have outperformed the market throughout the sample period. The results for market timing and selectivity are mostly the same for both categories of funds. However, Islamic unit trusts seem to have better resistance to market downturn than conventional unit trusts. The results of this research can be used by investors to identify funds or create portfolios that are more suitable for a recessionary scenario and for fund managers to better manage their portfolio performance during times when markets are likely to fall. The findings in this article are highly relevant for policymakers, investors and fund managers to determine policy matters, deciding on investment and marketing strategy for Islamic mutual funds.
... In addition, Goetzmann and Ibbotson (1994), Grinblatt et al. (1995) and Wermers (1999) also reveal some evidence on successful stock picking, which partially explains the short-run persistence in mutual fund performance. On the question of managers' timing skills, Treynor and Mazuy (1966), Henriksson and Merton (1981), Chang and Lewellen (1984), Graham and Harvey (1996) report limited or non-existent significant market timing ability while Bollen and Busse (2001) and Chance and Hemler (2001) find such evidence. ...
Article
Full-text available
In this paper we assess the weak-form efficiency of Exchange Traded Funds market applying various parametric and non-parametric tests. The parametric tests performed concern serial correlation tests and Augmented Dickey-Fuller (ADF) unit root test while the nonparametric tests used is the Phillips-Peron (PP) unit root test. To assess ETF market efficiency, we employ full daily return historical data of a sample of 66 equity-linked ETFs traded in the U.S. stock over the period 2001-2010. The performed tests provide evidence on the fact that the efficient market hypothesis holds in the ETF market. In particular, the majority of serial correlation tests show the lack of such an issue in the time series of ETF returns, which is a prerequisite in order for the efficient market hypothesis to be verified. Moreover, both the parametric and non-parametric unit root tests adopted reveal the non-existence of such an issue with respect to the pricing of ETFs and, therefore, the weakform of the efficient market hypothesis seems not to be infringed in the U.S. ETF market.
... 4. Specifically, November's consumer price index will be available at the end of December. 5. Following Chance and Hemler's (2001) argument that higher frequency data yield more significant results than lower frequency data, but recognising that the frequency of tactical asset allocation is constrained by expense, time and information requirements, the study employs monthly data to test the IAPE metric. See also Tezel and McManus (2001: 175 ...
Article
Full-text available
Asset allocation plays a central role in determining investment outcomes, and available evidence shows that portfolio results can be enhanced through tactical asset allocation if managers use the simple price-earnings ratio as a predictor of equity returns. Recently, some international evidence has emerged which shows that, by augmenting the price-earnings metric with information about consumer price inflation, further enhancements can be achieved in tactical asset allocation. This study reviews these arguments as they apply to South Africa, and finds that an inflation-augmented price-earnings ratio is more successful in forecasting equity returns than is the simple price-earnings ratio. Moreover, the metric is found to be significant in explaining relative asset class returns. On a risk-adjusted basis, however, the tool fails to improve the portfolio results when compared to a buy-and-hold strategy. <br /
... Using daily data, Bollen and Busse (2005) show evidence of market timing ability in a large portion of their sample. Similarly, Chance and Hemler (2001) track the daily allocation strategies of 30 professional (non-mutual fund) market timers. The authors find a large percentage of successful market timers. ...
Article
This paper examines the short-term persistence in performance of equity mutual funds around the world between 1990 and 2013. Using a large survivorship bias-free sample of 35 countries, we document strong evidence of persistence in daily mutual fund returns over quarterly measurement periods. We rank countries by abnormal return and estimate the performance of each country for the following quarter. We find statistically and economically significant performance persistence that is more pronounced for the top and bottom countries. The post-ranking abnormal return disappears when performance is examined over longer time periods. Thus, our results confirm that superior performance is a short-lived phenomenon.
... Hedge funds, however, are more volatile than both mutual funds and market indices. Chance, D. M., and M. L. Hemler (2001) examined the performance of 30 professional market timers during 1986-1994. Prior studies have analyzed implicit recommendations from mutual fund returns or explicit recommendations from newsletters. ...
Article
Full-text available
Most investors ask just one thing of their mutual funds: red-hot returns. Now, in the wake of the trading scandals that harmed the shareholders of some funds, investors are also looking for fund management they can trust. But by examining the behavior of a fund's managers and directors, you can get a sense for how strongly the fund is acting in the shareholders' interest. How can you tell whether a fund is likely to put its shareholders first? Unfortunately, there's no litmus test. Nor is there a guarantee that a fund with strong policies won't mess up. This study analyzed the timing skills of fund managers and evaluated the performance of equity mutual funds and helps in understanding fund manager's performance by providing a link between timing skills of fund manager & mutual fund performance. The study analyzed that the timing abilities of fund managers of the private equity mutual funds (foreign, domestic & joint venture equity mutual funds) are far superior compared to the market timing abilities of the PSU managed equity mutual funds. The study also reveals that there is a positive relationship between timing skills & excess returns.
... They found evidence of market timing ability in a significant number of funds in their sample using daily data. Chance and Helmer (2001) used daily data to track the allocation strategies of 30 professional fund market timers and found a significant number of market timers. Furthermore, according to Goetzmann, Ingersoll and Ivković (2000), a monthly frequency might fail to capture the contribution of a manager's timing activities to fund returns, because decisions regarding market exposure are made more frequently than monthly for most of the funds (Sehgal, 2008). ...
Chapter
Mutual funds have been a convenient way for investors to gain the benefit of a diversified portfolio. Mutual fund managers collect funds from a large number of small investors and create a portfolio of assets, and each investor owns a small part of this portfolio in proportion to his investments. The difference between mutual funds and unit trusts lies in their legal structure, but the end result for investors is similar (Investment Company Institute (ICI), 2009). The very obvious potential risk for unit trusts is the volatility of market activities, which will affect the value of a security, bonds or any other security (Lau, 2007). Islamic mutual funds are different from conventional mutual funds as they invest only in Shariah-compliant assets such as stocks and sukuks (Fikriyah et al, 2007; Elfakhani et al, 2005). Conventional unit trust funds managers do not solely invest in equity markets compared with Islamic unit trusts; rather the fund may also comprise all types of risk-free investment (Low and Ghazali, 2007).
... Existing literature documents a performance difference between daily and monthly holding periods. Bollen and Busse (2001), who study mutual fund managers, and Chance and Hemler (2001) , who investigate professional market timers, document successful market timing when daily data, but not monthly data, are used. Examining monthly recommendations, Metrick (1999), Jaffe and Mahoney (1999), and Graham and Harvey (1996) all conclude that investment newsletters fail to offer superior market timing advice in U.S. markets. ...
Article
In this paper, we report the first empirical tests concerning the performance of international investment strategies recommended by a panel of investment houses from 1982 through 2001. The data for this study comes from surveys published in the Financial Report, a confidential newsletter purchased by The Economist Newspaper, Ltd., in 1989. In the surveys, the investment houses recommended strategic asset allocations among equity, bonds, and cash, as well as tactical equity allocations across six countries. The performance of the recommended portfolio weights are compared to several pre-specified static benchmark portfolios. We also compare the returns of the recommended portfolio weights to a set of 1,000 returns that are generated by randomly shuffling the recommended weights. As a final measurement, we test whether the investment houses had superior information after adjusting for a set of conditioning variables. In this sample, it appears that the investment houses had little skill at recommending tactical equity allocations across countries. However, it does appear that the investment houses, as a group, had some skill concerning strategic asset allocations. We find that the market crash of October 1987 may have had a profound effect on the strategic portfolio performance. Before the Crash, the investment houses, as a group, exhibit skill. That is, they outperform several static and dynamic benchmarks. After the Crash, it appears that the investment houses overweighted in bonds for a lengthly interval, which may have led to inferior performance.
... These results provide evidence that confirm the findings by Goetzmann et al. (2000) that the use of daily data appears to increase the power of the market timing models to detect market timing ability. Chance and Hemler (2001) analyze daily explicit recommendations by market participants and also find evidence of market timing ability. Results in both papers further suggest that, when monthly data is used, the evidence of positive market timing ability disappears. ...
Article
This paper addresses a potential shortcoming in the work on the market timing ability of fund managers. We adapt the Henriksson-Merton (1981) test for market timing by relaxing a behavioral assumption that is implicit in the use of daily data. To this end, we relax the assumption that managers base their market timing decisions on daily excess returns. Instead, we use results from the literature on bull and bear markets and test whether fund managers can successfully time such trends in financial markets. We make use of a proprietary dataset of daily Commodity Trading Advisors (CTAs) returns to show that CTAs, on average, are able to time the bull and bear markets we identify.
... 4. Specifically, November's consumer price index will be available at the end of December. 5. Following Chance and Hemler's (2001) argument that higher frequency data yield more significant results than lower frequency data, but recognising that the frequency of tactical asset allocation is constrained by expense, time and information requirements, the study employs monthly data to test the IAPE metric. See also Tezel and McManus (2001: 175 ...
Article
Full-text available
Asset allocation plays a central role in determining investment outcomes, and available evidence shows that portfolio results can be enhanced through tactical asset allocation if managers use the simple price-earnings ratio as a predictor of equity returns. Recently, some international evidence has emerged which shows that, by augmenting the price-earnings metric with information about consumer price inflation, further enhancements can be achieved in tactical asset allocation. This study reviews these arguments as they apply to South Africa, and finds that an inflation-augmented price-earnings ratio is more successful in forecasting equity returns than is the simple price-earnings ratio. Moreover, the metric is found to be significant in explaining relative asset class returns. On a risk-adjusted basis, however, the tool fails to improve the portfolio results when compared to a buy-and-hold strategy.
... Using daily data, Bollen and Busse (2005) show evidence of market timing ability in a large portion of their sample. Similarly, Chance and Hemler (2001) track the daily allocation strategies of 30 professional (non-mutual fund) market timers. The authors find a large percentage of successful market timers. ...
... The literature in this area is focused on developing sophisticated statistical tools that can detect and measure the market timing ability of professional fund managers [1]. Numerous uses of these techniques over decades have produced mixed results [2,3,4,5,6,7]. Some authors detect no market timing ability, while others report statistically significant evidence of market timing ability. ...
Article
Full-text available
Market timing is an investment technique that tries to continuously switch investment into assets forecast to have better returns. What is the likelihood of having a successful market timing strategy? With an emphasis on modeling simplicity, I calculate the feasible set of market timing portfolios using index mutual fund data for perfectly timed (by hindsight) all or nothing quarterly switching between two asset classes, US stocks and bonds over the time period 1993--2017. The historical optimal timing path of switches is shown to be indistinguishable from a random sequence. The key result is that the probability distribution function of market timing returns is asymetric, that the highest probability outcome for market timing is a below median return. Put another way, simple math says market timing is more likely to lose than to win---even before accounting for costs. The median of the market timing return probability distribution can be directly calculated as a weighted average of the returns of the model assets with the weights given by the fraction of time each asset has a higher return than the other. For the time period of the data the median return was close to, but not identical with, the return of a static 60:40 stock:bond portfolio. These results are illustrated through Monte Carlo sampling of timing paths within the feasible set and by the observed return paths of several market timing mutual funds.
... The finding of not persistence of market timing performance is in not in conformity with the findings of a study viz. Chance and Hemler, (2001) but similar to the study like Bollen and Busse (2001). The above mentioned table 3.1 of ANOVA single factor test shows the F critical value 1.475 and F value is 1.797 which means that F value is more than F critical value which depicts that the means of the five populations are not equal. ...
Article
Full-text available
The persistence in manager's ability to select stocks and to time risk factors is a vital issue for accessing the performance of any asset management company. The fund manager who comes out successful today, whether the same will be able to sustain the performance in the future is a matter of concern to the investors and other stake holders. More than the stock picking ability of fund managers, one would be interested in knowing whether there is consistency in selectivity and timing performance or not. If a fund manager is able to deliver better performance consistently i.e. quarter-after-quarter or year-after-year, then the mangers' performance in selecting the right type of stocks for the portfolio would be considered satisfactory. This paper has attempted to analyze the persistence in both stock selection and timing performance of mutual fund managers in India through Henriksson & Morton; Jenson, and Fama's model over a period of five years. It is found that the fund managers present persistence in selection skills however, the sample funds haven't shown progressive timing skills in Indian context.
... Empirical results usually show that this bias negatively impacts the timing evidence. Furthermore, Goetzmann, Ingersoll, and Ivkovi c (2000), Bollen and Busse (2001) and Chance and Hemler (2001) found that timing evidence may differ due to the frequency of the return data. Additionally, some studies also provide evidence that cash inflows previous to an upward market may reduce portfolio betas and therefore, may bias market timing measurement (e.g. ...
Article
We propose a novel performance attribution model for equity fund portfolios. The model analyses investment decisions based on portfolio holdings and measures the value added from different sources of performance such as past return strategies, security selection, market timing and passive timing. The model was tested for a sample of mutual funds. Empirical results show that security selection is the main contributor to fund performance regardless of the sample period considered or the asset pricing model used. The evidence of timing ability is mixed with low significance. Nevertheless there are noticeable differences between the timing ability of the best and worst performing funds, especially in crisis periods. Analysing the relationship between mutual fund performance (and its different components) and fund characteristics, we find that top funds are significantly smaller and more concentrated than other funds. Finally, we also examine the persistence in the performance and in its components finding evidence of positive persistence in past return strategies and picking skills although this persistence is not shown in the overall performance.
... The trade-off between different step-sizes is between the strategy's sensitivity to the revision versus the amount of time the strategy is constrained at one of the limits. We chose step-sizes of 0.20 because, when combined with quintile sorts, steps of 0.20 times the quintile rank allow the strategy to reach either the long or short limit without being constrained at the limit very often, as seen inTable 2. 10 This strategy is similar to those reported byGraham and Harvey (1996) andChance and Helmer (2001), who investigate the performance of professional market timer recommendations. The recommendations take the form of a mix of investment between cash and the market index, with the weights constrained on the unit interval. ...
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There is a logical bound on the time-series variability of analyst forecasts; when variability exceeds this bound it must be caused by something besides statistically rational forecasting. We document occurrences of excessively volatile analyst forecasts and show that they influence investment performance. Comparing trading rules based on forecasts that are excessively volatile and those that are not, we find the returns to investing based on the former are significantly lower, with higher daily volatility, and a lower Sharpe ratio. We also show that returns to trading based on excessively volatile forecasts underperform the most when there is little news arriving and when the news that does arrive is relatively neutral. In this region, it is hardest to argue that analysts are unwittingly overreacting to news; instead, they appear to be intentionally making extreme forecasts to curry favor with management or to differentiate themselves from other analysts.
... This is similar to having the consumption growth betas and the market risk premium written as functions of cay.3 A more technical argument for the predictive power of the consumption-wealth ratio relies on consumption and aggregate wealth being cointegrated as a result of an intertemporal budget constraint.4 Lettau and Ludvigson [2001a] used the equally weighted portfolio of all NYSE, AMEX and NASDAQ stocks instead of S&P500 index.5 ...
Article
Full-text available
We test whether market-timing strategies using deviations from the long-run log consumption-wealth ratio (cay) deliver superior investment perfomance. Using several statistical tests, we conclude that true cay contains economically significant information about future market returns. However, constraints such as the need of using estimated rather than true cay and the delays in availability of macroeconomic data cast doubt over the possibility of timing the market via mechanistic strategies based on cay. Further research is needed to ascertain whether successful timing strategies based on cay can be implemented.
... The main characteristic of these studies is that returns are considered monthly or annually. The usage of more frequent return data could lead in different inferences about the managers' market timing ability according to Bollen and Busse (2001) and Chance and Hemler (2001). Indeed, these authors adopt daily return data and demonstrate that the mutual fund managers exhibit significant timing abilities. ...
Article
This paper expands the debate about "active vs. passive" management using data from active and passive ETFs listed in the U.S. market. The results reveal that the active ETFs underperform both the corresponding passive ETFs and the market indexes. With respect to risk-adjusted returns, both active and passive ETFs provide investors with no positive excess returns, an expectable finding for the passive ETFs but not for the active ETFs which are aimed at beating the market. Going further, the underperformance of active ETFs is depicted to the low performance rates such as the Sharpe or the Treynor ratios they receive relative to the passive ETFs and the indexes. Furthermore, regression analysis on the selectivity and market timing skills of ETF managers indicate that the managers of both the active and passive ETFs are lacking in such skills. However, the passive managers are not expected to have such skills. Finally, tracking error estimates indicate that the discrepancy between ETF and index returns is greater for active ETFs. However, this result is to be expected as the active ETFs do not target to replicate the performance of the indexes.
... For a survey of literature on this issue seeBrown and Goetzmann (1995),Chance and Hemler (2001),Bollen and Busse (2005). ...
Presentation
We examine persistence in performance of South Africa’s mutual funds with a sample of 6,000 funds for the period 1990-2015. We exploit panel data showing both fund and firm level characteristics and include both surviving and dead funds to control for selection bias. Our key hypothesis is that some managers are able to beat the market and generate above market returns either in the short or long run giving rise to the possibility of an observed performance persistence.
Article
I develop new measures of the value of active mutual fund management using portfolio holdings. These measures simultaneously test for trading and selection skill within stocks, industries, and characteristics. I demonstrate that most of the skill documented in prior studies comes from correctly trading stocks within industries, though funds also have some skill in timing industries. However, prior research focuses on the period 1980‐1994. I also test the hold out sample 1995‐2007. Contrary to prior results, the latter period (and the full sample) demonstrates that mutual funds generate no excess returns from any category of skill.
Article
This paper studies the performance of three trading strategies: the sample Sharpe ratio, the momentum and the contrarian strategies subjected to the value at risk and expected shortfall constraint using 30 or 90 stocks with an equal weight or mean-variance optimization allocation. The results show that imposing the risk constraint deteriorates the performance, except for the case of using Sharpe ratio as a stock selection criteria. However, both unconstrained and constrained strategies outperform the market, especially for the contrarian strategies. However under the risk constrained strategies, the value at risk constraint strategy performs better than the expected shortfall constraint strategies. Moreover, the performance is improved when we use mean-variance optimization allocation and allow for leveraging.
Article
We address the practical question of whether investors and researchers are likely to make invalid inferences about fund manager performance when using the wrong model and/or benchmark. We consider three well-known models, those of Jensen (1968), Treynor and Mazuy (1966), and Henriksson and Merton (1981), and two commonly used timing benchmarks, the S&P 500 index and CRSP value-weighted index. Although prior studies recognize the possibility of model and benchmark misspecification, the existing literature does not explore empirically the existence, magnitude, and significance, if any, of potential inferential errors. Based on Monte Carlo simulations calibrated to real mutual fund data, we find that: (1) model misspecification results in severely biased measures of both selectivity and timing ability, especially for extreme (good and bad) performers; (2) but biases in measures of overall performance are economically insignificant; (3) benchmark misspecification results in qualitatively similar difficulties, with the addition that overall performance as well can be biased; and (4) model and benchmark misspecification do not appreciably alter the power to detect ability and distinguish a good fund from a bad fund. These results are robust to alternative asset pricing specifications, alternative simulation schemes, varying length of the return series, and periodicity of the simulated series. The use of daily fund returns amplifies our conclusions about the biases induced by model misspecifications. Moreover, the biases we identify appear to be difficult to correct by using standard model selection criteria and misspecification tests. If the benchmark is known but the timing model is not, investors should use measures of overall performance to evaluate funds and managers.
Article
The objective of this paper is to establish that variation in market timing results can be attributed to the favorability of engaging in market timing strategies and not changes in investors behavior or skill. This hypothesis is very similar to the idea successfully tested in playing 21 by Thorpe in “Beat the Dealer” (1966). Just as the conditions of playing the game of blackjack switch from favoring the house to favoring the player, I propose that the conditions of the market can switch from favoring buy and hold investing to favoring market timing strategies and these conditions can be systematically measured in any equity market. The MT-BH metric measures the favorability of engaging in market timing strategies in any equity trading market. The MT-BH metric was created for 44 country indexes from 1994-2008 to indicate which years were most favorable for market timing strategies. This study generalizes the market timing results of eight past studies covering mutual funds, stocks, option traders and individual investors across several US and International indexes. The MT-BH metric is particularly accurate in explaining the results for option traders and hedge fund managers. Academics and practitioners now have an additional metric from which to measure market timing skill of an investor or manager across any equity market.
Article
This paper is the first to use daily trade-level data of actively managed mutual funds to examine their market timing abilities over different horizons. We develop trade-based timing measures of mutual funds to separately examine the timing ability in their buy and sell trades. We find that funds exhibit strong positive timing ability in their sells at all horizons. In contrast, they show negative timing ability in their buys over horizons two months and longer. Window-dressing motives of managers at quarter ends and/or distortion in managers’ strategies due to significant fund inflows can potentially explain such negative timing ability in buy trades. In their overall trades, funds exhibit positive timing ability at short horizons up to 2 months but insignificant timing ability at horizons 3 months or longer. Our study sheds light on the skill of mutual fund managers to predict market returns and how it is affected by their commitment to provide continuous liquidity to their investors.
Article
Purpose – The paper aims to empirically examine the forecasting ability of US-based world mutual funds during the 2001-2007 time period. Design/methodology/approach – World mutual funds are treated as portfolios composed of two sets of securities, i.e. domestic and foreign and two methodologies are used to measure forecasting ability: domestic differential exposure and assertion rates. Domestic differential exposure is based on the difference between each fund exposure to the domestic market when it is the outperforming market and the portfolio exposure to the domestic market when the foreign market is outperforming. Similar to the differential exposure, assertion rates measure the ability of fund managers to pick, on a monthly basis, an outperforming market. Findings – Although changing economic conditions in both domestic and foreign markets provided plenty of opportunities to outperform market benchmarks, the results of two empirical tests reveal that fund managers fail to effectively manage their exposure to both markets. Some evidence of good forecasting ability is found when funds are examined on a yearly basis. Originality/value – This study provides the first implementation of both methodologies: domestic differential exposure and assertion rates, to examine global funds.
Article
In this paper, we analyze equity mutual funds from the main European countries using daily and monthly returns to determine whether the temporary frequency of the data produces changes in the identification of timing skills by fund managers that justifies the current trend in the finance literature of using daily returns instead of monthly observations for performance measurement purposes. In our analysis we employ data for 17 European countries from 1990 to 2020, we appreciate a greater significance in the results obtained when using daily returns, approximately 10% of funds show significantly positive market timing skills and the same proportion of funds show negative market timing across countries. In the present study, we show the usefulness of the increase in the temporal frequency of the observations as the use of daily data instead of monthly returns implies a greater significance in the results obtained. Our findings indicate that some mutual fund managers take advantage of the predictability of market returns explained in the finance literature. Thus, potential investors might try to identify the managers who have these timing skills to invest in their funds.
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Using a unique dataset and methodology, I am able to obtain more precise estimates of hybrid fund manager holdings before, during and after low liquidity months. I document evidence that hybrid fund managers are able to predict changes in equity market liquidity, and that the abil-ity to react to these changes adds value for investors. These results hold for 4 different measures of aggregate liquidity. Additionally, it is shown that hybrid fund managers exhibit a flight to li-quidity during periods in which equity market trading costs are abnormally high.
Article
Purpose This study aims to examine whether mutual funds can earn daily alpha and time daily market return. Design/methodology/approach Based on the Treynor and Mazuy (1966) model and the Henriksson and Merton (1981) model, the author tests the daily market-timing ability of actual mutual funds and bootstrapped mutual funds. Findings The author finds that daily alpha and daily market-timing ability can come from pure luck. In addition, the relation between fund alpha and market-timing ability is at best minimal. Originality/value Using bootstrapped funds as the benchmark, this study shows that daily fund market is overall efficient.
Article
Using daily mutual fund returns to estimate market timing, some econometric issues, including heteroscedasticity, correlated errors, and heavy tails, make the traditional least squares estimate in Treynor-Mazuy and Henriksson-Merton models biased and severely distort the t-test size. Using ARMA-GARCH models, weighted least squares estimate to ensure a normal limit, and random weighted bootstrap method to quantify uncertainty, we find more funds with positive timing ability than the Newey-West t-test. Empirical evidence indicates that funds with perverse timing ability have high fund turnovers and funds trade-off between timing and stock picking skills.
Chapter
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Sentiment Analysis (SA) is an active area of study in the field of text mining. SA is the computational treatment of thoughts, emotions and literary subjectivity. This paper addresses a detailed summary of the latest update in this area. The related fields of SA (transfer learning, emotional detection, and resource building) that attracted researchers have recently been explored. The paper provides a description of the various approaches to sentiment classification and methods used for sentiment analysis. Starting from this summary, the paper introduces a classification of methods with respect to features, advantages and limitations.
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We study whether mutual funds systematically manage the downside risk of their portfolios in ways that improve their performance. We find that actively managed mutual funds on average possess positive downside-risk-timing ability. Managers adjust funds’ downside risk exposure in response to macroeconomic information; however, downside-risk-timing skills remain strong even after controlling for macro variables. Funds more skilled in timing downside risk outperform those that are not by 14.3 bp per month (or 1.73% annualized) unconditionally and by 39.9 bp per month (or 4.89% annualized) during recessions; they also attract larger flows. Received September 11, 2016; editorial decision Januaruy 08, 2018 by Editor Wayne Ferson.
Article
Market timing is the ability of portfolio managers to anticipate stock market return by increasing (decreasing) portfolio sensitivity in upward (downward) markets. To assess market timing, the financial literature has proposed return-based and holdings-based measures. Our objective is to analyze the performance of these measures in relation to interim trading bias. This bias is due to managers trading between the observation dates used to measure timing. As managers’ timing decisions are not observable we run the empirical analysis over a data set of simulated portfolios. This paper shows how holdings-based measures may lead to biased results if the timing estimation window does not match the managers’ timing decision window. Evidence is found that holdings-based measures are unable to detect daily timing ability. Also, these measures are not unbiased to measure monthly timing if estimation and decision windows do not coincide on the same days; in consequence, there is an underestimation of the actual timing parameter and its significance.
Article
We explore the ability of U.S. fund managers to forecast their respective style benchmarks by regressing the associated excess style index return of each fund on lagged values of the realized beta time series with lags of the predetermined publicly available information variables included to control for publicly available information. A significantly positive value of the coefficient on the lagged realized beta of the funds indicates an appropriate rebalancing of the fund portfolio. In the stock selection context the "realized" beta series is fed into a market model to obtain a residual alpha time series. The time varying "realized" alpha series is then regressed on the demeaned lagged publicly available predetermined information variables and a significantly positive regression intercept indicates superior stock selection ability. We find no timing ability at monthly frequencies but at quarterly frequencies we find a significant proportion of large capitalization funds time their respective style benchmarks. Using monthly data we find a significantly negative abnormal return in the first month of the quarter and a significantly positive abnormal return in the third month of the quarter for a significant portion of small capitalization funds. At quarterly frequencies, a large portion of small capitalization funds exhibit stock picking abilities.
Article
The exact conditions under which volatility timing strategies yield value are documented. These conditions include: the ability to correctly forecast next period stochastic variance, and violation of a strict version of Merton’s intertemporal capital asset pricing model (ICAPM). While the empirical evidence supports the first of these conditions, the latter remains open to debate. Our empirical results confirm the former, but demonstrate a significant violation of the (strict) ICAPM. It follows that volatility timing strategies appear to have value. However, using reasonable parameter values plugged into the derived formulae, the results also show that extreme leverage is often required for success. A method of tempering leverage is proposed, which is somewhat able to loosen the requirement of high leverage while still maintaining a good performance level. Given the likely variation in (strict) ICAPM violations across time and assets, it follows that volatility timing success (or failure) is very much sample dependent.
Article
In this paper the authors extend the analysis in Woodward and Brooks (2010) to derive a generalized form of Merton's (1981) dual beta market timing model that allows for continuous adjustment of portfolio beta in response to changing market conditions, and also includes the dual beta model as a special case. The model provides a more realistic representation of the fund return generation process. Using this model the authors test the market timing skills of fund managers for a sample of Australian superannuation funds for the period 1990 to 2002. The authors find that managed funds in which investors voluntarily select a given fund (retail funds) experience frequent rebalancing when compared to managed funds in which the investors' contribution is involuntary (wholesale funds). The authors relate the greater sensitivity to all changes in market conditions of retail funds to higher expenses and poor performance that was found in a recent study by Langford, Faff and Marisetty (2006). The results have important implications for Australian superannuation policy, since the Australian Government, effective from 1st July 2005, has required all funds to introduce voluntary contribution schemes.
Article
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This paper investigates whether Korean fund managers possess market-timing ability by considering portfolio holdings. Early studies employing return-based timing measures typically provided evidence of limited or no market-timing ability for mutual fund managers in the U.S., the U.K., Australia, among others. On the contrary, recent studies that employ measures based on portfolio holdings, most notably, have suggested that U.S. mutual fund managers have such ability. In line with this result, we test this evidence in Korean fund market. We think that this is the first study to provide an in-depth analysis of the performance of Korean fund managers by considering a comprehensive sample of fund holdings and using tests based on fund holdings and those based on returns, as in Our empirical results indicate that on average, active managers of equity funds have a positive market-timing ability for long forecast horizons These results are consistent with the findings of The implications of these empirical results suggest that Korean fund managers utilize market timing to enhance the performance of their actively managed equity funds.
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Celem artykułu jest analiza funduszy Exchange Traded Fund na rynku polskim. Po dokonaniu przeglądu literatury światowej na temat funkcjonowania wspomnianego zjawiska poddano weryfikacji szereg hipotez. Do porównania ponadprzeciętnych stóp zwrotu osiąganych z jedynego ETF na WIG20 notowanego na polskim rynku giełdowym ze stopami otrzymanymi na indeksie wykorzystano regresję liniową modelu Jensena. Na jej podstawie wywnioskowano, iż fundusz ten nie daje ponadprzeciętnych wyników w odniesieniu do swojego benchmarku. Na podstawie modelu zaproponowanego przez Treynora i Mazuya wykazano brak tendencji do wykorzystywania ruchów rynkowych. Ponadto poddano analizie wielkość błędu odwzorowania ETF od indeksu WIG20 przy użyciu trzech metod. Pierwszą z nich było szacowanie błędu standardowego z równania regresji liniowej modelu Jensena, kolejną określenie średniej wartości bezwzględnej różnic stóp zwrotu z ETF i WIG20. Obie wspomniane metody dały wyniki podobne do tych otrzymanych dla ETF na indeksach dla giełdy nowojorskiej. Ostatnią wykorzystaną miarą skuteczności naśladowania indeksu jest średnia wartość bezwzględna odchylenia ETF od WIG20. Uzyskane wnioski wskazują na istniejące, ale niedoskonałe naśladowanie indeksu przez analizowany fundusz, co skłoniło autorów do ich zweryfikowania oraz wskazania kierunków praktycznego wykorzystania.
Article
In this paper, we evaluate the performance of selected equity-based mutual funds in India. We argue that multi-factor benchmarks provide better selectivity and timing measures compared to one-factor CAPM as they control for style characteristics such as size, value and momentum. The results timing ability, and to some extent stock selectivity improve when we use daily instead of monthly data. We feel that higher observation frequency captures the trading skills of more active fund managers in a better fashion. We show that timing should be examined in a multi-dimensional framework with additional measures for timing of style characteristics. Further our timing results are not an outcome of any spurious statistical phenomenon.
Article
In this paper, the authors use monthly holdings to study timing ability. These data differ from holdings data used in previous studies in that the authors' data have a higher frequency and include a full range of securities, not just traded equities. Using a one-index model, the authors find, as do two recent studies, that management appears to have positive and statistically significant timing ability. When a multiindex model is used, the authors show that timing decisions do not result in an increase in performance, whether timing is measured using conditional or unconditional sensitivities. The authors show that sector rotation decisions with respect to high-tech stocks are a major contribution to negative timing. © The Authors 2011. Published by Oxford University Press [on behalf of the European Finance Association]. All rights reserved.
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We analyze the advice contained in a sample of 237 investment letters over the 1980-1992 period. Each newsletter recommends a mix of equity and cash. We construct portfolios based on these recommendations and find that only a small number of the newsletters appear to have higher average returns than a buy-and-hold portfolio constructed to have the same variance. Knowledge of the asset allocation weights also implies knowledge of the exact conditional betas. As a result, we present direct tests of market timing ability that bypass beta estimation problems. Assuming that different letters cater to investors with different risk aversions, we are able to imply the newsletters' forecasted market returns. The dispersion of the newsletters' forecasts provides a natural measure of disagreement in the market. We find that the degree of disagreement contains information about both market volatility and trading activity.
Article
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Many investment newsletters offer market-timing advice; that is, they are supposed to recommend increased stock market weights before market appreciations and decreased weights before market declines. Examination of the performance of 326 newsletter asset-allocation strategies for the 1983-95 period shows that as a group, newsletters do not appear to possess any special information about the future direction of the market. Nevertheless, investment newsletters that are on a hot streak (have correctly anticipated the direction of the market in previous recommendations) may provide valuable information about future returns.
Article
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This paper addresses the bias associated with parametric measurement of timing skill based on monthly timer returns when timers can make daily timing decisions. Simulations suggest that the classic Henriksson-Merton parametric measure of timing skill is weak and biased downward when applied to the monthly returns of a daily timer. The paper proposes an adjustment that mitigates this problem without the need to collect daily timer returns. Four tests of timing skill, carried out on a sample of 558 mutual funds, show that very few funds exhibit statistically significant timing skill. More encompassing, the adjusted-FF3 test (based on the specification that incorporates both the proposed adjustment and the Fama-French three-factor model) is the least biased measure of timing skill among the four—it provides for a sharper inference regarding timing skill and helps mitigate biases associated with the choice of investment style.
Article
Full-text available
Monetary policies of the ECB and US Fed can be characterised by Taylor rules, that is both central banks seem to be setting rates by taking into account the output gap and inflation. We also set up and tested Taylor rules which incorporate money growth and the euro-dollar exchange rate, thereby improving the fit between actual and Taylor rule based rates. In general, Taylor rules appear to be a much better way of describing Fed policy than ECB policy. Simulations suggest that the ECB's short-term interest rates have been at a much lower level in the last two years compared with what a Taylor rule would suggest.
Article
This paper analyzes the recommendations of common stocks made by the investment newsletters followed by the Hulbert Financial Digest. We conclude that, taken as a whole, the securities that newsletters recommend do not outperform appropriate benchmarks. Our data provide modest evidence that the future performance of a newsletter is related to its past performance, when performance is measure by raw returns. Evidence of persistence vanishes, however, when performance is measured by abnormal returns. We find little, if any, evidence of herding, i.e., cross-sectional dependence of recommendations, across newsletters. Newsletters tend to recommend securities that have performed well in the recent past. Finally, newsletters with poor past performance are more likely to go out of business.
Article
The dichotomy between timing ability and the ability to select individual assets has been widely used in discussing investment performance measurement. This paper discusses the conceptual and econometric problems associated with defining and measuring timing and selectivity. In defining these notions we attempt to capture their intuitive interpretation. We offer two basic modeling approaches, which we term the portfolio approach and the factor approach. We show how the quality of timing and selectivity information can be identified statistically in a number of simple models, and discuss some of the econometric issues associated with these models. In particular, a simple quadratic regression is shown to be valid in measuring timing information.
Article
Previous studies show that interest rates, dividend yields, and other commonly available variables are useful market indicators, but until now, measures of fund performance have not used the information. This article modifies classical performance measures to take account of well-known market indicators. The conditional performance evaluation approach avoids some of the biases that plague traditional measures. Applied to a sample of mutual funds, the conditional measures make the funds' performance look better.
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The first two volumes are complete revisions of Kendall's two volumes, written in 1943 and 1946. Harvard Book List (edited) 1971 #77 (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Article
Existing studies of mutual fund market timing analyze monthly returns and find little evidence of timing ability. We show that daily tests are more powerful and that mutual funds exhibit significant timing ability more often in daily tests than in monthly tests. We construct a set of synthetic fund returns in order to control for spurious results. The daily timing coefficients of the majority of funds are significantly different from their synthetic counterparts. These results suggest that mutual funds may possess more timing ability than previously documented.
Article
This paper uses daily returns to examine how mutual funds modify their risk during the last several months of a year based on their performance during the first several months of the year. Relative to monthly data, daily returns provide much more efficient estimates of fund volatility, yielding vastly different inferences about the behavior of fund managers. In particular, monthly results consistent with a tendency for year-to-date underperformers to increase their risk levels relative to better performing funds disappears with daily data. This indicates that results previously attributed to managerial behavior are more likely an artifact of inefficient monthly volatility estimates.
Article
Recent research shows that emerging markets are distinguished by high returns and low covariances with global market factors. To check whether these results can be attributed to their recent emergence, we simulate a simple, general model of global markets, with a realistic survival process. The simulations reveal a number of new effects. We find that pre-emergence returns are systematically lower than post-emergence returns, and that the brevity of a market history is related to the bias in returns as well as to the world beta. These patterns are confirmed by an empirical analysis of emerging and submerged markets.
Article
The paper shows that the Henriksson-Merton (1981) test (Journal of Business 54, 513–533) of market timing is better interpreted as an exact test of independence within a 2×2 contingency table in which the column and row sums are fixed. We provide a generalization of the test of market timing from the special case of a 2×2 contingency table to the case with n categories. This generalization has a number of potential applications in the forecasting and finance literature. The generalized test is applied to analyze the market timing performance of a two-fund investment strategy in the presence of transaction costs.
Article
Monetary policies of the ECB and US Fed can be characterised by Taylor rules, that is both central banks seem to be setting rates by taking into account the output gap and inflation. We also set up and tested Taylor rules which incorporate money growth and the euro-dollar exchange rate, thereby improving the fit between actual and Taylor rule based rates. In general, Taylor rules appear to be a much better way of describing Fed policy than ECB policy. Simulations suggest that the ECB's short-term interest rates have been at a much lower level in the last two years compared with what a Taylor rule would suggest.
Article
This article empirically examines market timing and selectivity performance of a sample of mutual funds. It uses a very simple regression technique to separate stock selection ability from timing ability. This technique, first suggested by Treynor and Mazuy and later refined by Bhattacharya and Pfleiderer, uses a modified security-market line approach to produce individual measures of timing and stock selection ability. The inputs to the model are only the returns earned on the fund and those earned on the market portfolio. The empirical results indicate that at the individual fund level there is some evidence of superior micro- and macroforecasting ability on the part of the fund manager. Copyright 1990 by the University of Chicago.
Article
The paper analyses the effect of equity-price shocks on current account positions for the G-7 industrialized countries during 1974–2007. It uses a Bayesian vector autoregression with sign restrictions for the identification of equity-price shocks and to test empirically for their effect on current accounts. Such shocks are found to exert a sizable effect, with a 10 percent equity price increase, for example, in the United States relative to the rest of the world, worsening the U.S. trade balance by 0.9 percentage points after 16 quarters. However, the response of the trade balance to equity-price shocks varies substantially across countries. The evidence suggests that the channels accounting for this heterogeneity function both through wealth effects on private consumption and to some extent through the real exchange rate of countries. IMF Staff Papers (2009) 56, 633–654. doi:10.1057/imfsp.2009.8; published online 26 May 2009
Article
This paper addresses the bias associated with parametric measurement of timing skill based on monthly timer returns when timers can make daily timing decisions. Simulations suggest that the classic Henriksson-Merton parametric measure of timing skill is weak and biased downward when applied to the monthly returns of a daily timer. The paper proposes an adjustment that mitigates this problem without the need to collect daily timer returns. Four tests of timing skill, carried out on a sample of 558 mutual funds, show that very few funds exhibit statistically significant timing skill. More encompassing, the adjusted-FF3 test (based on the specification that incorporates both the proposed adjustment and the Fama-French three-factor model) is the least biased measure of timing skill among the four--it provides for a sharper inference regarding timing skill and helps mitigate biases associated with the choice of investment style.
Article
This article reexamines the autocorrelation patterns of short-horizon stock returns. We document empirical results which imply that these autocorrelations have been overstated in the existing literature. Based on several new insights, we provide support for a market efficiency-based explanation of the evidence. Our analysis suggests that institutional factors are the most likely source of the autocorrelation patterns.
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This article presents a model that provides insights about various measures of portfolio performance. The model explores several criticisms of these measures. These include the problem of identifying an appropriate benchmark portfolio, the possibility of overestimating risk because of market-timing ability, and the failure of informed investors to earn positive risk-adjusted returns because of increasing risk aversion. The article argues that these need not be serious impediments to performance evaluation.
Article
This paper analyzes the equity-portfolio recommendations made by investment newsletters. The dataset spans 16 years, is free of survivorship and back-fill biases, and includes the recommendations of 145 different newsletters. Overall, there is no significant evidence of superior stock-picking ability for this universe of newsletters. Some individual letters do have superior performance records, but this does not occur more often than would be expected by chance, and these records are never more extreme than would be expected for the sample size. In addition, while there is some short-term performance persistence, a strategy of buying past winners does not earn statistically significant excess returns.
Article
The main goal in this paper is to gauge the sensitivity of conventional measures of abnormal mutual-fund performance to the benchmark chosen to measure normal performance. The authors employed standard CAPM benchmarks and a variety of APT benchmarks to investigate this question and found little similarity between the absolute and relative rankings implied by them. Hence, both the model for risk and return and the method used to construct the APT benchmark are important choices in this context. Finally, the authors found statistically significant measured abnormal performance using all benchmarks. The economic interpretation of this phenomenon appears to be an open question. Copyright 1987 by American Finance Association.
Article
This paper analyzes the recommendations of common stocks made by the investment newsletters followed by the Hulbert Financial Digest. We conclude that, taken as a whole, the securities that newsletters recommend do not outperform appropriate benchmarks. Our data provide modest evidence that the future performance of a newsletter is related to its past performance, when performance is measured by raw returns. However, evidence of persistence vanishes when performance is measured by abnormal returns. We find little, if any, evidence of herding, i.e., cross-sectional dependence of recommendations, across newsletters. Newsletters tend to recommend securities that have performed well in the recent past. Finally, newsletters with poor past performance are more likely to go out of business.
Article
In this paper we examine the Henriksson-Merton test of market timing and its potential usefulness in evaluating investment advice. The paper proposes a natural extension of the test that is valid under more general assumptions about the distribution of asset returns. We show that the Henriksson-Merton test and its more general counterpart are special cases of standard tests of market rationality and efficiency. Both tests are applied to a group of foreign exchange advisory services.
Article
The trustees of funded defined benefit pension schemes must make two vital and inter-related decisions - setting the asset allocation and the contribution rate. While these decisions are usually taken separately, it is argued that they are intimately related and should be taken jointly. The objective of funded pension schemes is taken to be the minimization of both the mean and the variance of the contribution rate, where the asset allocation decision is designed to achieve this objective. This is done by splitting the problem into two main steps. First, the Markowitz mean-variance model is generalised to include three types of pension scheme liabilities (actives, deferreds and pensioners), and this model is used to generate the efficient set of asset allocations. Second, for each point on the risk-return efficient set of the asset-liability portfolio model, the mathematical model of Haberman (1992) is used to compute the corresponding mean and variance of the contribution rate and funding ratio. Since the Haberman model assumes that the discount rate for computing the present value of liabilities equals the investment return, it is generalised to avoid this restriction. This generalisation removes the trade-off between contribution rate risk and funding ratio risk for a fixed spread period. Pension schemes need to choose a spread period, and it is shown how this can be set to minimise the variance of the contribution rate. Finally, using the result that the funding ratio follows an inverted gamma distribution, shortfall risk and expected tail loss are computed for funding below the minimum funding requirement, and funding above the taxation limit. This model is then applied to one of the largest UK pension schemes - the Universities Superannuation Scheme
Article
This paper analyzes the equity-portfolio recommendations made by investment newsletters. Overall, there is no significant evidence of superior stock-picking ability for this sample of 153 newsletters. Moreover, there is no evidence of abnormal short-run performance persistence ("hot hands"). The comprehensive and bias-free transactions database also allows for insights into the precision of performance evaluation. Using a measure of precision defined in the paper, a transactions-based approach yields a median improvement of 10 percent over a corresponding factor model. This compares favorably with the precision gained by adding factors to the CAPM. Copyright The American Finance Association 1999.
Article
This paper describes a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction. It also establishes consistency of the estimated covariance matrix under fairly general conditions.
Article
A model is developed which implies that if an analyst has high reputation or low ability, or if there is strong public information that is inconsistent with the analyst's private information, she is likely to herd. Herding is also common when informative private signals are positively correlated across analysts. The model is tested using data from analysts who publish investment newsletters. Consistent with the model's implications, the empirical results indicate that a newsletter analyst is likely to herd on "Value Line's "recommendation if her reputation is high, if her ability is low, or if signal correlation is high. Copyright The American Finance Association 1999.
Article
The use of predetermined variables to represent public information and time-variation has produced new insights about asset pricing models but the literature on mutual fund performance has not exploited these insights. This paper advocates conditional performance evaluation in which the relevant expectations are conditioned on public information variables. The authors modify several classical performance measures to this end and find that the predetermined variables are both statistically and economically significant. Conditioning on public information controls for biases in traditional market timing models and makes the average performance of the mutual funds in the authors' sample look better. Copyright 1996 by American Finance Association.
Article
THE PURPOSE OF THIS PAPER is to determine the degree of nonstationarity in the risk levels and performance measures of mutual fund portfolios and reconcile several observed inconsistencies in the literature concerning a bias in risk-adjusted performance measures. A necessary condition for the estimation of the Jensen [17, 18] risk-adjusted performance measure and any statistical inference conerning that measure is that the mutual fund's systematic risk remain constant over time.' This assumption is unsatisfactory because mutual funds, generally being actively managed, should have a changing level of systematic risk as a result of the buying and selling decisions of their managers. For example, if a manager can make better than average forecasts of future realizations on market factors, he is expected to adjust portfolio risk in anticipation of market movements. The level of portfolio systematic risk can be substantially changed in either direction by altering the proportions of high and low risk securities in the portfolio. The important point is that the risk level of a managed portfolio is a decision variable. We should expect to observe nonstationary risk levels2 of managed portfolios as a result of timing
Article
An uninformed observer using the tools of mean variance and security market line analysis to measure the performance of a portfolio manager who has superior information is unlikely to be able to make any reliable inferences. While some positive results of a very limited nature are possible, e.g., when there is a riskless asset or when information is restricted to be “security specific,” in general anything is possible. In particular, a manager with superior information can appear to the observer to be below or above the security market line and inside or outside of the mean‐variance efficient frontier, and any combination of these is possible.
A tale of three schools
  • Boudoukh
Herding among investment newsletters
  • Graham
Testing for market timing ability
  • Cumby
Market timing ability and volatility implied in investment newsletters’ asset allocation recommendations. Unpublished working paper
  • J Graham
  • C Harvey
Portfolio performance evaluation
  • Grinblatt
The investment performance of mutual funds
  • Kon
Market timing and mutual fund performance
  • Lee
Performance evaluation with transactions data
  • Metrick
Market timing with small versus large-firm stocks
  • Kester