Market timing ability and mutual funds: a heterogeneous agent approach

Author: Frijns, B; Gilbert, A; Zwinkels, RCJ

Date: 2013-10-25

Publisher: Taylor & Francis

Type: Journal article

Link to this item using this URL: http://hdl.handle.net/10292/5777

Auckland University of Technology

Abstract

This paper proposes a novel approach to determine whether mutual funds time the market. The proposed approach builds on a heterogeneous agent model, where investors switch between cash and stocks depending on a certain switching rule. This represents a more flexible, intuitive, and parsimonious approach. The traditional market timing models are essentially a special case of our model with contemporaneous switching rule. Applying this model to a sample of 400 US equity mutual funds, we find that 41.5% of the funds in our sample have negative market timing skills and only 3.25% positive skills. 20% of funds apply a forward:looking approach in deciding on market timing, and 13.75% a backward looking approach. We also note that market timing differs considerably over fund styles.

Subjects: Mutual funds, Market timing, Heterogeneous agents models

Citation: ["Quantitative Finance, Vol. 13 (10), pp. 1613-1620."]

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