Effects of Asymmetric Information on Market Timing in the Mutual Fund Industry

International Journal of Managerial Finance, 14(5), pp.542-557 (September, 2018).

24 Pages Posted: 19 Mar 2018 Last revised: 4 Oct 2018

See all articles by Vanessa S. Tchamyou

Vanessa S. Tchamyou

African Governance and Development Institute

Simplice Asongu

African Governance and Development Institute

Jacinta Nwachukwu

Coventry University

Date Written: March 15, 2018

Abstract

The paper investigates the effects of information asymmetry (between the realised return and the expected return) on market timing in the mutual fund industry. For the purpose, we use a panel of 1488 active open-end mutual funds for the period 2004-2013. We use fund-specific time-dynamic betas. Information asymmetry is measured as the standard deviation of idiosyncratic risk. The dataset is decomposed into five market fundamentals in order to emphasis the policy implications of our findings with respect to (i) equity, (ii) fixed income, (iii) allocation, (iv) alternative and (v) tax preferred mutual funds. The empirical evidence is based on endogeneity-robust Difference and System Generalised Method of Moments. The following findings are established. First, information asymmetry broadly follows the same trend as volatility, with a higher sensitivity to market risk exposure. Second, fund managers tend to raise (cutback) their risk exposure in time of high (low) market liquidity. Third, there is evidence of convergence in equity funds. We may therefore infer that equity funds with lower market risk exposure are catching-up with their counterparts with higher exposure to fluctuation in market conditions. The paper complements the scarce literature on market timing in the mutual fund industry with time-dynamic betas, information asymmetry and an endogeneity-robust empirical approach.

Keywords: Information asymmetry; Mutual funds; Market timing; Market uncertainty

JEL Classification: G12; G14; G18

Suggested Citation

S. Tchamyou, Vanessa and Asongu, Simplice and Nwachukwu, Jacinta, Effects of Asymmetric Information on Market Timing in the Mutual Fund Industry (March 15, 2018). International Journal of Managerial Finance, 14(5), pp.542-557 (September, 2018).. Available at SSRN: https://ssrn.com/abstract=3141122 or http://dx.doi.org/10.2139/ssrn.3141122

Vanessa S. Tchamyou

African Governance and Development Institute ( email )

P.O. Box 8413
Yaoundé, 8413
Cameroon

Simplice Asongu (Contact Author)

African Governance and Development Institute ( email )

P.O. Box 8413
Yaoundé, 8413
Cameroon

Jacinta Nwachukwu

Coventry University ( email )

Priory Street
Coventry, CV1 5FB
United Kingdom

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