TAILIEUCHUNG - On the Timing Ability of Mutual Fund Managers

The workshop participants included: (a) general managers and high-level staff of social funds; (b) representatives of central government institutions that oversee the operations of the funds; (c) representatives of municipal governments that interact with social funds in the selection and implementation of subprojects and of their regional associations; (d) representatives of nongov- ernmental organizations (NGOs) and civil society organizations that work with social funds; (e) staff of the World Bank and of other multilateral and bilateral development agencies that finance, design, and supervise the implementation of social funds; and (f) observers including researchers, academicians, and consultants involved with social funds and representatives of national governments that are establishing. | On the Timing Ability of Mutual Fund Managers AT 1 TA T A T A 11 1 T r r A T A Nicolas . Bollen and Jeffrey A. Busse Forthcoming Journal of Finance Bollen is Assistant Professor of Finance at the David Eccles School of Business University of Utah. Busse is Assistant Professor of Finance at the Goizueta Business School Emory University. The authors thank René Stulz an anonymous referee Uri Loewenstein Tom Smith Liz Tashjian and seminar attendees at the 2000 European Finance Association meetings University of Utah and the Australian Graduate School of Management for their useful comments. ABSTRACT Existing studies of mutual fund market timing analyze monthly returns and find little evidence of timing ability. We show that daily tests are more powerful and that mutual funds exhibit significant timing ability more often in daily tests than in monthly tests. We construct a set of synthetic fund returns in order to control for spurious results. The daily timing coefficients of the majority of funds are significantly different from their synthetic counterparts. These results suggest that mutual funds may possess more timing ability than previously documented. The performance of mutual funds receives a great deal of attention from both practitioners and academics. Almost 50 percent of . households invest in mutual funds with an aggregate investment of over five trillion dollars Investment Company Institute 2000 . Given the size of their stake the investing public s interest in identifying successful fund managers is understandable especially in light of mounting evidence that the returns of most actively managed funds are lower than index fund From an academic perspective the goal of identifying superior fund managers is interesting because it challenges the efficient market hypothesis. In this paper we examine the ability of mutual fund managers to time the market that is to increase a fund s exposure to the market index prior to market advances and to .

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