Market timing ability and mutual funds: a heterogeneous agent approach

Bart Frijns, Aaron Gilbert and Remco Zwinkels ()

Quantitative Finance, 2013, vol. 13, issue 10, 1613-1620

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 approach is more flexible, intuitive, and parsimonious than the traditional convexity approach. 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. Twenty percent of funds apply a forward-looking approach in deciding on market timing, and 13.75% a backward-looking approach. We find that growth funds tend to be more backward-looking and income funds tend to be more forward-looking.

Date: 2013
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DOI: 10.1080/14697688.2013.791749

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