Business Cycles and Mutual Fund Timing Performance: An Application of Regime Switching and GARCH Modeling

29 Pages Posted: 22 Aug 2011 Last revised: 25 Aug 2011

See all articles by Judy Qiu

Judy Qiu

University of Queensland - Business School

Robert W. Faff

University of Queensland

Karen L. Benson

University of Queensland - Business School; Financial Research Network (FIRN)

Date Written: August 21, 2011

Abstract

In this paper, we study mutual fund performance in terms of timing ability with daily data from 1998 to 2009. A novel timing model is proposed by incorporating the regime-switching framework into the Treynor and Mazuy (1966) model. The volatility follows a generalized autoregressive conditional heteroskedasticity (GARCH) process within each regime. The switching between two regimes (up and down markets) is governed by a first-order Markov process with state-dependent transition probabilities. The empirical tests are performed based on US domestic equity funds, represented by nine value-weighted portfolios based on stated investment objectives. We show that the regime switching model captures the asymmetric timing performance, whereas single regime models do not. The results of this paper show that fund managers have significant perverse timing attributes in up markets, but not in down markets. On average, institutional fund managers’ timing performance is worse than that of retail funds.

Keywords: Business cycle, GARCH, Regime-switching, Mutual Funds, Timing

JEL Classification: C58, G11, G23

Suggested Citation

Qiu, Judy and Faff, Robert W. and Benson, Karen L., Business Cycles and Mutual Fund Timing Performance: An Application of Regime Switching and GARCH Modeling (August 21, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1913935 or http://dx.doi.org/10.2139/ssrn.1913935

Judy Qiu (Contact Author)

University of Queensland - Business School ( email )

4072 Brisbane, Queensland
Australia

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Karen L. Benson

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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