Ability parity model for optimal fund allocation: Evidence from China's mutual fund markets

Weiyi Liu, Yangyi Liu, Ronghua Luo and Yue Ding

Emerging Markets Review, 2021, vol. 48, issue C

Abstract: We propose in this article a novel ability parity model for optimal fund allocation. Compared with the traditional portfolio selection methods which directly work on asset returns and/or risk (volatility), the proposed ability parity method focuses mainly on the allocation between the stock selection ability and market timing ability of fund managers, which essentially determines fund performance (Fama, 1972). Using the data of China's mutual fund markets, we find strong and robust evidence that the proposed ability parity model delivers significantly higher return, skewness, and Sharpe ratio than traditional models and the benchmark index, while having volatilities comparable with traditional models.

Keywords: Ability parity; Stock selection ability; Market timing ability (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:48:y:2021:i:c:s1566014121000121

DOI: 10.1016/j.ememar.2021.100804

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