Do Mutual Funds Time the Market? Evidence from Portfolio Holdings
49 Pages Posted: 16 Jan 2005 Last revised: 23 Jun 2020
Date Written: October 1, 2006
Previous research finds insignificant market-timing ability for mutual funds using tests based on fund returns. The return-based tests, however, are subject to the ‘‘artificial timing’’ bias. In this paper, we propose and implement new measures of market timing based on mutual fund holdings. Our holdings-based measures do not suffer from the artificial timing bias. We find that, on average, actively managed U.S. domestic equity funds have positive timing ability. Market timing funds use non-public information to predict market returns, tend to have high industry concentration, large fund size, a tilt toward small-cap stocks, and are active in industry rotation.
Keywords: market timing, mutual fund
JEL Classification: G10
Suggested Citation: Suggested Citation