Mutual Fund Style Timing Skills and Alpha
35 Pages Posted: 12 Feb 2009 Last revised: 17 Dec 2009
Date Written: November 24, 2009
Selecting mutual funds on only alpha or a single style timing skill (e.g. market timing) leads to overestimating the loading on the selected characteristic and a negative bias towards other characteristics. Consequently, ex-post performance of the top decile is often weak. 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. First, the estimated alphas and style timing loadings of the top decile are estimated more accurately. Second, 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.
Keywords: mutual funds, style timing skill, alpha
JEL Classification: G11, G14, G19
Suggested Citation: Suggested Citation