A Nonparametric Test of Market (Mis-) Timing
52 Pages Posted: 13 Oct 2001
Date Written: August 2001
In this paper we propose a nonparametric test for money managers' market timing ability and apply the analysis to a large sample of mutual funds that have different benchmark indices. The test (i) only requires the ex post returns of the funds and the benchmark portfolios; (ii) isolates timing from selectivity; (iii) separates the quality of timing information a money manager possesses from the aggressiveness with which she reacts to such information; and (iv) is robust to different information and incentive structures as well as underlying distributions. Theta - the parameter for timing ability - is on average below the neutral level (indexation) among actively managed domestic equity funds, and is very difficult to predict from observable fund characteristics. Overall, actively managed funds aiming at "timing the market" in general fall short of just "riding with the market."
Keywords: Market timing, Nonparametric test, U-statistics
JEL Classification: G1, C1
Suggested Citation: Suggested Citation