Test for Market Timing Using Daily Fund Returns

Lei Jiang, Weimin Liu and Liang Peng

Journal of Business & Economic Statistics, 2022, vol. 41, issue 1, 184-196

Abstract: 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.

Date: 2022
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DOI: 10.1080/07350015.2021.2006670

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