Market Timing: A Decomposition of Mutual Fund Returns

L.A.P. Swinkels, P.J. van der Sluis, M.J.C.M. Verbeek

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Abstract

We decompose the conditional expected mutual fund return in ve parts.Two parts, selectivity and expert market timing, can be attributed to manager skill, and three to variation in market exposure that can be achieved by private investors as well.The dynamic model that we use to estimate the relative importance of the components in the decomposition is a generalization of the performance evaluation models by Lockwood and Kadiyala (1988) and Ferson and Schadt (1996).We nd that the restrictions imposed in existing models may lead to di¤erent inferences about manager selectivity and timing skill.The results from our sample of 78 asset allocation mutual funds indicate that several funds exhibit significant expert market timing, but for most funds variation in market exposures does not yield any economically signi cant return.Funds with high turnover and expense ratios are associated with managers with better skills.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages40
Volume2003-95
Publication statusPublished - 2003

Publication series

NameCentER Discussion Paper
Volume2003-95

Keywords

  • mutual funds
  • performance evaluation
  • markets
  • models

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    Swinkels, L. A. P., van der Sluis, P. J., & Verbeek, M. J. C. M. (2003). Market Timing: A Decomposition of Mutual Fund Returns. (CentER Discussion Paper; Vol. 2003-95). Finance.