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Mutual Fund Skill in Timing Market Volatility and Liquidity

Forthcoming, International Journal of Finance and Economics

42 Pages Posted: 1 Jun 2017  

Jason Foran

University College Cork

Niall O'Sullivan

University College Cork

Date Written: May 31, 2017

Abstract

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

Foran, Jason and O'Sullivan, Niall, Mutual Fund Skill in Timing Market Volatility and Liquidity (May 31, 2017). Forthcoming, International Journal of Finance and Economics . Available at SSRN: https://ssrn.com/abstract=2977795

Jason Foran

University College Cork ( email )

5 Bloomfield Terrace Western Road
Cork
Ireland

Niall O'Sullivan (Contact Author)

University College Cork ( email )

Department of Economics
University College Cork
Cork, n/a
Ireland

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