Mutual Fund Skill in Timing Market Volatility and Liquidity
Forthcoming, International Journal of Finance and Economics
42 Pages Posted: 1 Jun 2017
Date Written: May 31, 2017
We investigate both market volatility timing and market liquidity timing for the first time among UK mutual funds. We find strong evidence that a small percentage of funds time market volatility successfully, i.e., when conditional market volatility is higher than normal, systematic risk levels are lower. The evidence around market liquidity timing ability is similar although it is slightly less prevalent compared to volatility timing. Here, funds lower the fund market beta in anticipation of reduced market liquidity. We also find a positive relation between liquidity timing ability and fund abnormal performance where skilled liquidity timers outperform unskilled timers by around 3% p.a. - though this finding is driven by poor liquidity timing funds going on to yield negative alpha. However, despite the evidence of volatility and liquidity timing ability among funds, we fail to find in support of persistence in this timing. We find little evidence supporting market return timing ability.
Keywords: mutual fund performance, volatility, liquidity, timing
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation