Market Timing: A Decomposition of Mutual Fund Returns

43 Pages Posted: 6 Nov 2003

See all articles by Laurens Swinkels

Laurens Swinkels

Erasmus University Rotterdam (EUR); Robeco Quantitative Investments

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Pieter Jelle van der Sluis

affiliation not provided to SSRN

Date Written: 20 2003, 10

Abstract

We decompose the conditional expected mutual fund return in five parts. Two parts, selectivityand expert market timing, can be attributed to manager skill, and three to variation in marketexposure that can be achieved by private investors as well. The dynamic model that we use toestimate the relative importance of the components in the decomposition is a generalization ofthe performance evaluation models by Lockwood and Kadiyala (1988) and Ferson and Schadt(1996). We find that the restrictions imposed in existing models may lead to different inferencesabout manager selectivity and timing skill. The results from our sample of 78 asset allocationmutual funds indicate that several funds exhibit significant expert market timing, but for mostfunds variation in market exposures does not yield any economically significant return. Fundswith high turnover and expense ratios are associated with managers with better skills.

Keywords: market timing, mutual funds, performance evaluation, pensioenfondsen

JEL Classification: M, M41, G3, G23

Suggested Citation

Swinkels, Laurens and Verbeek, Marno and van der Sluis, Pieter Jelle, Market Timing: A Decomposition of Mutual Fund Returns (20 2003, 10). ERIM Report Series Reference No. ERS-2003-074-F&A. Available at SSRN: https://ssrn.com/abstract=463807

Laurens Swinkels

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Quantitative Investments ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

Marno Verbeek (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Pieter Jelle Van der Sluis

affiliation not provided to SSRN

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