Market Timing of CTAs: An Examination of Systematic CTAs vs. Discretionary CTAs

40 Pages Posted: 17 Mar 2008 Last revised: 26 Jun 2009

See all articles by Hossein B. Kazemi

Hossein B. Kazemi

University of Massachusetts at Amherst - Isenberg School of Management

Ying Li

University of Washington, Bothell - Business

Date Written: Feb 22, 2008

Abstract

This paper uses a set of return-based factors to test for market (return and volatility) timing ability of Commodity Trading Advisors (CTAs). Unlike previous research, we use return-based factors that are related to the markets in which most CTAs trade. This leads to a higher explanatory power for our multifactor model. Our approach allows us to test for the presence of market timing in multiple markets, and, therefore, we are able to identify the markets in which CTAs have market timing ability. We find that systematic CTAs are in general better at market timing than discretionary CTAs, with the latter having slightly better overall risk-adjusted performance during our study period: Jan 1994 to Dec 2004. We suspect that this is caused by higher turnover of portfolios of discretionary CTAs leading to frequent changes in their factor exposures that cannot be captured through monthly observations. We show that CTAs display a negative relationship between market timing ability and security selection, and as a group CTAs generate their returns mainly from market timing, rather than security selection ability.

Keywords: CTA, discretionary, systematic, market timing, volatility timing

JEL Classification: G11, G23

Suggested Citation

Kazemi, Hossein B. and Li, Ying, Market Timing of CTAs: An Examination of Systematic CTAs vs. Discretionary CTAs (Feb 22, 2008). Available at SSRN: https://ssrn.com/abstract=1008553 or http://dx.doi.org/10.2139/ssrn.1008553

Hossein B. Kazemi

University of Massachusetts at Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Ying Li (Contact Author)

University of Washington, Bothell - Business ( email )

18115 Campus Way NE
Bothell, WA 98011-8246
United States

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