Market Timing Ability and Mutual Funds: A Heterogeneous Agent Approach
Quantitative Finance, Forthcoming
31 Pages Posted: 8 Dec 2011 Last revised: 13 Jun 2014
Date Written: 2013
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: Suggested Citation