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Jensen’s Alpha and the Market Timing Puzzle

37 Pages Posted: 25 Aug 2008 Last revised: 30 Nov 2016

Sebastian Bunnenberg

Leibniz Universität Hannover

Martin Rohleder

University of Augsburg

Hendrik Scholz

Friedrich-Alexander-Universität (FAU) Erlangen-Nürnberg

Marco Wilkens

University of Augsburg

Date Written: November 28, 2016

Abstract

Theory predicts that market timing in managed portfolios biases Jensen’s alpha. However, empirical studies have failed to find evidence this bias actually exists. We tackle this puzzle by showing via a nested model approach and various simulations that, for the bias to become economically relevant, its components, the extent of timing activity and market conditions, must be extreme. Empirically, however, such conditions rarely occur, explaining why the bias does not appear in the data. In a comprehensive empirical analysis of US mutual funds, we find that measures of total performance that allow for timing activities are virtually identical to Jensen’s alpha. Hence, the key takeaway of this paper is that Jensen’s alpha is a sufficient measure of total performance, even in the presence of timing.

Appendix available at https://ssrn.com/abstract=2877173

Keywords: Mutual fund performance; stock selection; market timing; total performance; conditional performance

JEL Classification: G11, G23

Suggested Citation

Bunnenberg, Sebastian and Rohleder, Martin and Scholz, Hendrik and Wilkens, Marco, Jensen’s Alpha and the Market Timing Puzzle (November 28, 2016). Available at SSRN: https://ssrn.com/abstract=1253923 or http://dx.doi.org/10.2139/ssrn.1253923

Sebastian Bunnenberg (Contact Author)

Leibniz Universität Hannover ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

HOME PAGE: http://www.finance.uni-hannover.de

Martin Rohleder

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4120 (Phone)

Hendrik Scholz

Friedrich-Alexander-Universität (FAU) Erlangen-Nürnberg ( email )

Finance and Banking
Lange Gasse 20
Nürnberg, Bavaria 90403
Germany
0049-911-5302649 (Phone)
0049-911-5302466 (Fax)

HOME PAGE: http://www.finanzierung.wiso.uni-erlangen.de

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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