Market Timing and Mutual Fund Performance: An Empirical Investigation

No-arbitrage conditions and expected returns when assets have different β’s in up and down markets

“…Henrikson (1984) and Kon (1983) find that mutual funds exhibiting larger upside than downside β's tend to have smaller α's. This finding is interpreted by authors as a trade-off between fund managers' timing and selection abilities.…”

The Market-Timing Ability of Chinese Equity Securities Investment Funds

“…Many studies find little evidence of statistically significant timing ability (particularly positive timing performance) but most of these studies also suggest that the abnormal market-timing performance is negatively correlated with abnormal stock-picking skills (Kon 1983;Chang and Lewellen 1984;Henriksson 1984;Lockwood and Kadiyala 1985). A rational explanation in the Henriksson (1984) study is that implementing a single rather than multi-factor performance model, mis-specifying the market portfolio, or error-in-variables bias may result in such empirical findings. However, Jagannathan and Korajczyk (1986) point out that the non-linear pay-off structure of options and option-like securities (such as highly leveraged stocks) may bias the conclusion of timing performance.…”

Modern portfolio theory, 1950 to date

“…Timing: The use of a single or multiple index model to judge performance and to forecast performance assumes that betas (sensitivities) are reasonably constant and that management does not change them to gain added return through market timing. There are a number of papers (e.g., Treynor and Mazuy, 1966;Lehmann and Modest, 1987;Henriksson, 1984) that examine the reasonableness of this assumption. The general conclusion is that timing does not increase risk-adjusted returns and may even lower them.…”

“…Of course, we are especially partial to our own Modern Portfolio Theory and Investment Analysis. 1 There are also good reviews in more advanced doctoral-level texts such as Ingersoll (1987) or Huang and Litzenberger (1988). There are also some careful mathematical treatments (Szego È , 1980).…”