| Summary: |
The issue of whether investment managers have timing ability has been the focus of several studies over the last 40 years, following
Treynor and Mazuy (1966) seminal paper. The evidence is mixed but most studies are not supportive of timing ability in mutual
funds. Exceptions are Bollen and Busse (2001) and Jian et al. (2008). Our research project focuses on European equity mutual funds
ability to time the market. We will investigate the following questions: (i) Do European mutual funds engage in tactical asset
allocation and successfully time the market? What kind of market-timing strategies do mutual funds use? What types of funds
possess timing ability? (ii) Does market timing cluster around particular events? (iii) Is there herding in tactical asset allocation? Is it
associated with public information?
We will document the observed shifts in portfolio broad asset classes and measure market-timing ability. We will also evaluate
whether observed shifts among industries, regions or styles convey timing ability and if funds choose to implement their timing skills
through changes in asset allocation or in the beta of their equity portfolio. We will then analyze whether fund (or portfolio holdings)
characteristics are related with timing skills. Further, we will evaluate if there is a relation between shifts in asset allocation and
market or business conditions. Finally we will investigate mutual fund herding at a broad asset class level and the trading behavior of
mutual funds in reaction to public information such as changes in analysts' consensus estimates.
Our research will contribute to the market timing ability literature in several aspects.
First, we will study European mutual funds while previous research has mostly concentrated on US (equity, income and hedge)
funds. Only a very few studies have examined European mutual funds timing ability but none has examined cross-country mutual
fund ability. This will be the first comprehensive s  |
Summary
The issue of whether investment managers have timing ability has been the focus of several studies over the last 40 years, following
Treynor and Mazuy (1966) seminal paper. The evidence is mixed but most studies are not supportive of timing ability in mutual
funds. Exceptions are Bollen and Busse (2001) and Jian et al. (2008). Our research project focuses on European equity mutual funds
ability to time the market. We will investigate the following questions: (i) Do European mutual funds engage in tactical asset
allocation and successfully time the market? What kind of market-timing strategies do mutual funds use? What types of funds
possess timing ability? (ii) Does market timing cluster around particular events? (iii) Is there herding in tactical asset allocation? Is it
associated with public information?
We will document the observed shifts in portfolio broad asset classes and measure market-timing ability. We will also evaluate
whether observed shifts among industries, regions or styles convey timing ability and if funds choose to implement their timing skills
through changes in asset allocation or in the beta of their equity portfolio. We will then analyze whether fund (or portfolio holdings)
characteristics are related with timing skills. Further, we will evaluate if there is a relation between shifts in asset allocation and
market or business conditions. Finally we will investigate mutual fund herding at a broad asset class level and the trading behavior of
mutual funds in reaction to public information such as changes in analysts' consensus estimates.
Our research will contribute to the market timing ability literature in several aspects.
First, we will study European mutual funds while previous research has mostly concentrated on US (equity, income and hedge)
funds. Only a very few studies have examined European mutual funds timing ability but none has examined cross-country mutual
fund ability. This will be the first comprehensive study on European mutual fund timing ability using a sample of over 2200 equity
mutual funds from 15 European countries.
Second, we will examine market timing ability as well as region, industry and style (momentum, value and size) rotation. Most of the
studies concentrate on only one aspect of timing ability.
Third, we will use several alternative timing measures - unconditional and conditional returns-based and holding-based timing
measures - while overall, studies have used approaches based upon return information. There are only a few exceptions (e.g., Jiang
et al. (2008)).
Fourth, we will evaluate timing ability at the aggregate level and at the fund level. At the fund-level, we will study the relation
between mutual fund ability, fund attributes, country characteristics and market conditions and allow for time-varying skills.
Finally, we will analyze the trading behavior of mutual funds at a broad asset class level to evaluate herding in market timing
strategies, and distinguish timing ability from spurious timing driven by systematic reaction to public information.
The research team has the required know-how to carry out the project. Carlos Alves has been working on a related topic for his
doctoral thesis, gathering evidence on mutual fund performance and on the effects of conflicts of interest between mutual fund
managers and clients on the composition of mutual fund portfolios, and has published three related papers in peer reviewed journals
(see [CA1]; [CA2]; [CA3]).
Ana Paula Serra has been investigating herding in the stock market and the evaluation of motives that could account for it. Her work
was published in an international readings book and related research resulted in three more papers published in a peer reviewed
journals (see [APS1]; [APS2]).
The research members share the required types of expertise for this project: knowledge of finance theory and familiarity with
empirical work (data analysis and estimation techniques).
This project will have an important impact in the graduate programs held at FEP, involving directly and indirectly master students
and doctoral students that will carry out studies within the above described research lines. |