Why is Timing Perverse?

30 Pages Posted: 16 Jan 2011  

Juan Carlos Matallín Sáez

Universitat Jaume I

David Moreno

Universidad Carlos III de Madrid - Department of Business Administration

Rosa Rodríguez

Universidad Carlos III de Madrid - Department of Business Administration

Date Written: January 14, 2011

Abstract

We analyze why traditional returns-based tests of market timing ability suggest in many cases that mutual fund managers evidence a negative market timing ability. The explanation is based on asymmetric correlations of stocks, which establishes that correlations are stronger in bear markets than in bull markets. This variation in stock correlations could mechanically lead to a variation in measured stock (and hence portfolio) betas in down versus up markets. We identify which stocks are more likely to increase beta in down markets and how this automatic change in betas will generate a negative bias in the market timing parameter of passively and actively managed portfolios. The paper investigates the sources of this mechanical variation in stocks’ betas that result in artificial timing ability for mutual funds. We find that a high percentage of the negative market timing ability identified for mutual funds in the literature could be explained by this bias.

Keywords: Mutual Funds, Asymmetric Correlations, Market Timing

Suggested Citation

Matallín Sáez, Juan Carlos and Moreno, David and Rodríguez, Rosa, Why is Timing Perverse? (January 14, 2011). Available at SSRN: https://ssrn.com/abstract=1740610 or http://dx.doi.org/10.2139/ssrn.1740610

Juan Carlos Matallín Sáez

Universitat Jaume I ( email )

Campus del Riu Sec
E-12071 Castello de la Plana
Spain
+34 964 728 568 (Phone)
+34 964 728 565 (Fax)

David Moreno

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Rosa Rodriguez (Contact Author)

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

HOME PAGE: http://www.business.uc3m.es/en/faculty/profesor/perfil/42

Register to support our free research

Register

Paper statistics

Downloads
82
rank
270,485
Abstract Views
552
PlumX