Journal
JOURNAL OF BUSINESS & ECONOMIC STATISTICS
Volume 41, Issue 1, Pages 184-196Publisher
TAYLOR & FRANCIS INC
DOI: 10.1080/07350015.2021.2006670
Keywords
ARMA-GARCH model; Heavy tails; Market timing; Mutual funds
Funding
- Simons Foundation
- NSF [DMS-2012448]
- TsinghuaUniversity Initiative Scientific Research Programand Institute for Industrial Innovation and Finance at Tsinghua University
- Tsinghua National Laboratory for Information Science and Technology
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Using ARMA-GARCH models with weighted least-squares estimate and random weighted bootstrap method, more funds with positive timing ability are identified. Empirical evidence suggests that funds with perverse timing ability tend to have high fund turnovers and need to balance between timing and stock picking skills.
Using daily mutual fund returns to estimate market timing, some econometric issues, including heteroscedasticity, correlated errors, and heavy tails, make the traditional least-squares estimate in Treynor-Mazuy and Henriksson-Merton models biased and severely distort the t-test size. Using ARMA-GARCH models, weighted least-squares estimate to ensure a normal limit, and random weighted bootstrap method to quantify uncertainty, we find more funds with positive timing ability than the Newey-West t-test. Empirical evidence indicates that funds with perverse timing ability have high fund turnovers and funds tradeoff between timing and stock picking skills.
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