Artificial Market Timing in Mutual Funds

We document statistically significant relations between mutual fund betas and past market returns driven by fund feedback trading. Against this backdrop, evidence of “artificial” market timing emerges when standard market timing regressions are estimated across periods that span time variation in fund systematic risk levels, as is typical. Artificial timing significantly explains the inverse relation between timing model estimates of market timing and stock selectivity. A fund’s feedback trading relates to its past performance and remains significant after accounting for trading on momentum. Fund flows suggest that investors value feedback trading, which helps hedge downside risk during bear markets.

Keywords: Feedback trading, mutual funds, artificial timing, transaction costs, fund performance

JEL Classification: G11, G23

Suggested Citation: Suggested Citation

Busse, Jeffrey A. and Ding, Jing and Jiang, Lei and Tang, Yuehua, Artificial Market Timing in Mutual Funds (June 17, 2022). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3554763 or http://dx.doi.org/10.2139/ssrn.3554763