Market Timing Ability and Mutual Funds: A Heterogeneous Agent Approach

Quantitative Finance, Forthcoming

31 Pages Posted: 8 Dec 2011 Last revised: 13 Jun 2014

See all articles by Bart Frijns

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Aaron B. Gilbert

Auckland University of Technology - Faculty of Business & Law

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: 2013

Abstract

This paper proposes a novel approach to determine whether mutual funds time the market. The proposed approach builds on a heterogeneous agent model, where investors switch between cash and stocks depending on a certain switching rule. This represents a more flexible, intuitive, and parsimonious approach. The traditional market timing models are essentially a special case of our model with contemporaneous switching rule. Applying this model to a sample of 400 US equity mutual funds, we find that 41.5% of the funds in our sample have negative market timing skills and only 3.25% positive skills. 20% of funds apply a forward-looking approach in deciding on market timing, and 13.75% a backward looking approach. We also note that market timing differs considerably over fund styles.

Keywords: mutual funds, market timing, heterogeneous agents models

JEL Classification: G11, G23

Suggested Citation

Frijns, Bart and Gilbert, Aaron B. and Zwinkels, Remco C.J., Market Timing Ability and Mutual Funds: A Heterogeneous Agent Approach (2013). Quantitative Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1969580 or http://dx.doi.org/10.2139/ssrn.1969580

Bart Frijns (Contact Author)

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Aaron B. Gilbert

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Remco C.J. Zwinkels

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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