Passive timing effect in portfolio management

Abstract

The primary objective of the present study is to analyse the extent of the passive timing effect in portfolio management. This effect is produced when a portfolio which is not managed actively shows signs of instability in its level of systematic risk. By contrast, market timing involves active management of the portfolio and therefore changes to the level of systematic risk in order to anticipate market movements in an appropriate manner. This study proposes a dynamic beta model which incorporates the effect of passive timing attributable to the accumulated evolution of weightings for the assets that make up the portfolio. The results demonstrate the importance of this effect when applying performance and market timing measures in order to evaluate portfolio results, such as those of mutual funds.

Stock Selection and Timing Ability of the Taiwan Equity Funds—The Application of Stochastic Beta, GARCH, and Nonlinear GLS

“…The basis of conventional fund-performance measurements of market timing was shown to be unrealistic, limiting the manager to constant beta during up and down markets [1]- [3]. Quite a few existing studies presented empirical results that supported an unstable level of systematic risk for mutual funds, such as Klemkosy and Maness [4], Kon and Jen [5], Fabozzi and Francis [6] [7], Miller and Gressis [8], Radcliffe, Brooks, and Levy [9], Golec [10], Busse [11] and Matallín and Fernández-Izquierdo [12]. However, previous related work on the Taiwan fund market is sparse.…”