The Forecasting Ability of Money Market Fund Managers and its Economic Value

48 Pages Posted: 15 Jul 2004 Last revised: 13 Oct 2008

See all articles by Alex Kane

Alex Kane

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS)

Youngki Lee

Boston University - Center for Polymer Studies

Date Written: December 1983

Abstract

The model proposed by Merton(1981) to determine the value of forecasting ability is adapted to investigate whether money market fund managers successfully anticipate changes in the yield curve by adjusting the average maturity of their portfolios in the right direction. The potential economic value of such behavior is assessed, and it is shown that if the portfolios of all money market funds were aggregated it would appear that managers are good forecasters even if individually they possess insignifcant forecasting ability. At the same time, the economic value of the aggregate portfolio will be diminished because of the reduced net change in average maturity. Thus, diversifying into many money market funds will not attain the gain that could be realized if an individual manager had a forecasting ability equal to the quality of the average forecast.A sample of 34 money market funds is investigated. Analysis suggests that a small fraction of the funds exhibited forecasting skills, but even they generated negligible economic value because the changes in their portfolios average maturity were too small.There appears to be no relationship between forecasting ability and economic success of money market funds as measured by asset size and growth.

Suggested Citation

Kane, Alex and Lee, Youngki, The Forecasting Ability of Money Market Fund Managers and its Economic Value (December 1983). NBER Working Paper No. w1243, Available at SSRN: https://ssrn.com/abstract=321298

Alex Kane (Contact Author)

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States

Youngki Lee

Boston University - Center for Polymer Studies

590 Commonwealth Ave
Boston, MA 02215
United States
617-491-6946 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
37
Abstract Views
857
PlumX Metrics