Cash-Flow Timing vs. Discount-Rate Timing: An Examination of Mutual Fund Market-Timing Skills

Finance Down Under 2016 Building on the Best from the Cellars of Finance

American Finance Association Meetings, 2017 Chicago

91 Pages Posted: 1 Oct 2015 Last revised: 13 Jun 2019

See all articles by Chunhua Lan

Chunhua Lan

University of New Brunswick - Fredericton; Financial Research Network (FIRN)

Russ Wermers

University of Maryland - Robert H. Smith School of Business

Date Written: june 1, 2019

Abstract

We measure the ability of professional investment managers in timing cashflow vs. discount-rate news, the two components of market returns. We find that the average U.S. equity mutual fund exhibits cashflow-timing skills of 2.12% per year, but discount-rate timing of -0.84%; cashflow-timing skills strongly persist over future quarters. The misspecification of market-timing skills accounts for the failure of prior research to locate skilled timing funds; such managers predict low-volatility cashflow news in the face of high-volatility discount-rate news, making skills difficult to detect with traditional models. Importantly, we find that value funds outperform growth funds in timing cashflow news.

Keywords: Cash-flow timing, discount-rate timing, market timing

JEL Classification: G12, G23

Suggested Citation

Lan, Chunhua and Wermers, Russell R., Cash-Flow Timing vs. Discount-Rate Timing: An Examination of Mutual Fund Market-Timing Skills (june 1, 2019). Finance Down Under 2016 Building on the Best from the Cellars of Finance . Available at SSRN: https://ssrn.com/abstract=2667409 or http://dx.doi.org/10.2139/ssrn.2667409

Chunhua Lan (Contact Author)

University of New Brunswick - Fredericton ( email )

Bailey Drive
P.O. Box 4400
Fredericton NB E3B 5A3
Canada

Financial Research Network (FIRN)

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

HOME PAGE: http://www.firn.org.au

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

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