Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-15T00:17:48.325Z Has data issue: false hasContentIssue false
  • English
  • Français

Monthly Measurement of Daily Timers

Published online by Cambridge University Press:  06 April 2009

William N. Goetzmann ,
Jonathan Ingersoll Jr  and
Zoran Ivković
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper addresses the bias associated with parametric measurement of timing skill based on monthly timer returns when timers can make daily timing decisions. Simulations suggest that the classic Henriksson-Merton parametric measure of timing skill is weak and biased downward when applied to the monthly returns of a daily timer. The paper proposes an adjustment that mitigates this problem without the need to collect daily timer returns. Four tests of timing skill, carried out on a sample of 558 mutual funds, show that very few funds exhibit statistically significant timing skill. More encompassing, the adjusted-FF3 test (based on the specification that incorporates both the proposed adjustment and the Fama-French three-factor model) is the least biased measure of timing skill among the four—it provides for a sharper inference regarding timing skill and helps mitigate biases associated with the choice of investment style.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 35 , Issue 3 , September 2000 , pp. 257 - 290
Copyright
Copyright © School of Business Administration, University of Washington 2000

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

All authors, Yale School of Management, 135 Prospect Street, Yale University, New Haven, CT 06510. We thank Don Chance (the referee) for several constructive suggestions. We also thank Steve Shellans and Ed Owens for useful discussions. We are grateful to Ken French, who graciously provided SMB and HML factor returns. Finally, we thank the 1999 WFA conference participants, especially the discussant Mark Grinblatt, for valuable comments.

References

Admati, A.; Bhattacharya, S.; Pfleiderer, P.; and Ross, S.. “On Timing and Selectivity.” Journal of Finance, 41 (1986), 715–732.10.2307/2328504CrossRefGoogle Scholar
Admati, A., and Ross, S.. “Measuring Investment Performance in a Rational Expectations Equilibrium Model.” Journal of Business, 58 (1985), 1–26.10.1086/296280CrossRefGoogle Scholar
Banz, R. “The Relationship between Return and Market Value of Common Stocks.” Journal of Financial Economics, 9 (1981), 3–18.10.1016/0304-405X(81)90018-0CrossRefGoogle Scholar
Blazenko, G.; Boyle, P.; and Newport, K.. “Valuation of Tandem Options.” In Advances in Futures and Options Research: A Research Annual, Vol. 4, Fabozzi, F., ed. Greenwich, CT, London, England: Jai Press (1990), 39–49.Google Scholar
Brocanto, J., and Chandy, P.. “Does Market Timing Really Work in the Real World?” Journal of Portfolio Management, 20 (1994), 39–44.10.3905/jpm.1994.39CrossRefGoogle Scholar
Brown, S., and Goetzmann, W.. “Mutual Fund Styles.” Journal of Financial Economics, 43 (1997), 373–399.10.1016/S0304-405X(96)00898-7CrossRefGoogle Scholar
Brown, S.; Goetzmann, W.; Ibbotson, R.; and Ross, S.. “Survivorship Bias in Performance Studies.” Review of Financial Studies, 5 (1992), 553–580.10.1093/rfs/5.4.553CrossRefGoogle Scholar
Brown, S.; Goetzmann, W.; and Kumar, A.. “The Dow Theory: William Peter Hamilton's Track Record Reconsidered.” Journal of Finance, 53 (1998), 1311–1333.10.1111/0022-1082.00054CrossRefGoogle Scholar
Brown, S.; Goetzmann, W.; and Ross, S.. “Survival.” Journal of Finance, 50 (1995), 853–873.10.2307/2329290CrossRefGoogle Scholar
Busse, J. “Volatility Timing in Mutual Funds: Evidence from Daily Returns.” Review of Financial Studies, 12 (1999), 1009–1041.10.1093/rfs/12.5.1009CrossRefGoogle Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.10.2307/2329556CrossRefGoogle Scholar
Chance, D., and Hemler, M.. “The Performance of Professional Market Timers: Daily Evidence from Executed Strategies.” Working Paper, Pamplin College of Business, Virginia Tech (1999).Google Scholar
Chang, E., and Lewellen, W.. “Market Timing and Mutual Fund Performance.” Journal of Business, 57 (1984), 57–72.10.1086/296224CrossRefGoogle Scholar
Chen, Z., and Knez, P.. “Portfolio Performance Measurement: Theory and Applications.” Review of Financial Studies, 9 (1996), 511–555.10.1093/rfs/9.2.511CrossRefGoogle Scholar
Cumby, R., and Glen, J.. “Evaluating the Performance of International Mutual Funds.” Journal of Finance, 45 (1990), 497–521.10.2307/2328667CrossRefGoogle Scholar
Cumby, R., and Modest, D.. “Tests for Market Timing Ability: A Framework for Forecast Evaluation.” Journal of Financial Economics, 19 (1987), 169–189.10.1016/0304-405X(87)90033-XCrossRefGoogle Scholar
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 1035–1058.10.2307/2329515Google Scholar
Dybvig, P., and Ross, S.. “Differential Information and Performance Measurement Using a Security Market Line.” Journal of Finance, 40 (1985), 383–399.10.2307/2327891CrossRefGoogle Scholar
Elton, E.; Gruber, M.; and Blake, C.. “The Persistence of Risk-Adjusted Mutual Fund Performance.” Journal of Business, 69 (1996a), 133–157.10.1086/209685CrossRefGoogle Scholar
Elton, E.; Gruber, M.; and Blake, C.. “Survivorship Bias and Mutual Fund Performance.” Review of Financial Studies, 9 (1996b), 1097–1120.10.1093/rfs/9.4.1097CrossRefGoogle Scholar
Fama, E., and French, K.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.10.2307/2329112Google Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.10.1016/0304-405X(93)90023-5CrossRefGoogle Scholar
Fama, E., and French, K.. “Multifactor Explanations of Asset Pricing Anomalies.” Journal of Finance, 51 (1996), 55–84.10.2307/2329302CrossRefGoogle Scholar
Ferson, W., and Schadt, R.. “Measuring Fund Strategy and Performance in Changing Economic Conditions.” Journal of Finance, 51 (1996), 425–461.10.2307/2329367CrossRefGoogle Scholar
Glosten, L., and Jagannathan, R.. “A Contingent Claims Approach to Performance Evaluation.” Journal of Empirical Finance, 1 (1994), 133–160.10.1016/0927-5398(94)90001-9CrossRefGoogle Scholar
Graham, J., and Harvey, C.. “Market Timing Ability and Volatility Implied in Investment Newsletters' Asset Allocation Recommendation.” Journal of Financial Economics, 42 (1996), 397–421.10.1016/0304-405X(96)00878-1CrossRefGoogle Scholar
Grinblatt, M., and Titman, S.. “Mutual Fund Performance: An Analysis of Quarterly Portfolio Holdings.” Journal of Business, 62 (1989a), 393–416.10.1086/296468CrossRefGoogle Scholar
Grinblatt, M., and Titman, S.. “Portfolio Performance Evaluation: Old Issues and New Insights.” Review of Financial Studies, 2 (1989b), 393–421.10.1093/rfs/2.3.393CrossRefGoogle Scholar
Grinblatt, M., and Titman, S.. “Performance Measurement without Benchmarks: An Examination of Mutual Fund Returns.” Journal of Business, 66 (1993), 47–68.10.1086/296593CrossRefGoogle Scholar
Grinblatt, M., and Titman, S.. “A Study of Monthly Mutual Fund Returns and Performance Evaluation Techniques.” Journal of Financial and Quantitative Analysis, 29 (1994), 419–444.10.2307/2331338S0022109000009017CrossRefGoogle Scholar
Grinblatt, M., and Titman, S.. “Performance Evaluation.” In Handbook in Operations Research and Managements Science, Vol. 9, Finance, Jarrow, R., Maksimovic, V., and Ziemba, W., eds. Amsterdam and New York: Elsevier (1995), 581–609.Google Scholar
Henriksson, R. “Market Timing and Mutual Fund Performance. An Empirical Investigation.” Journal of Business, 57 (1984), 73–96.10.1086/296225CrossRefGoogle Scholar
Henriksson, R., and Merton, R.. “On Market Timing and Investment Performance. II. Statistical procedures for Evaluating Forecasting Skills.” Journal of Business, 54 (1981), 513–533.10.1086/296144CrossRefGoogle Scholar
Jagannathan, R., and Korajczyk, R.. “Assessing the Market Timing Performance of Managed Portfolios.” Journal of Business, 59 (1986), 217–235.10.1086/296326CrossRefGoogle Scholar
Jensen, M. “The Performance of Mutual Funds in the Period 1945–1964.” Journal of Finance, 23 (1968), 389–416.10.2307/2325404Google Scholar
Jensen, M. “Risk, the Pricing of Capital Assets, and the Evaluation of Investment Portfolios.” Journal of Business, 42 (04 1969), 167–247.10.1086/295182CrossRefGoogle Scholar
Kon, S. “The Market-Timing Performance of Mutual Fund Managers.” Journal of Business, 56 (1983), 323–347.10.1086/296204CrossRefGoogle Scholar
Kothari, S., and Warner, J.. “Evaluating Mutual Fund Performance.” Working Paper, Sloan School of Management, MIT (1997).Google Scholar
Kraus, A., and Litzenberger, R.. “Skewness Preference and the Valuation of Risky Assets.” Journal of Finance, 31 (1976), 1085–1100.10.2307/2326275Google Scholar
Lehmann, B., and Modest, D.. “Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons.” Journal of Finance, 42 (1987), 233–265.10.2307/2328251CrossRefGoogle Scholar
Lintner, J. “Security Prices, Risk, and Maximal Gains from Diversification.” Journal of Finance, 20 (1965), 587–615.10.2307/2977249Google Scholar
Low, C. “Implicit Timing and Pseudo-Options in Stock Bulls and Bears.” Working Paper, Yale School of Management (1999).CrossRefGoogle Scholar
Mayers, D., and Rice, E.. “Measuring Portfolion Performance and the Empirical Content of Asset Pricing Models.” Journal of Financial Economics, 7 (1979), 3–28.10.1016/0304-405X(79)90020-5CrossRefGoogle Scholar
Merton, R. “On Market Timing and Investment Performance. I. An Equilibrium Theory of Value for Market Forecasts.” Journal of Business, 54 (1981), 363–406.10.1086/296137CrossRefGoogle Scholar
Mossin, J. “Equilibrium in a Capital Asset Market.” Econometrica, 34 (1966), 768–783.10.2307/1910098CrossRefGoogle Scholar
Newey, W., and West, K.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.10.2307/1913610CrossRefGoogle Scholar
Pfleiderer, P., and Bhattacharya, S.. “A Note on Performance Evaluation.” Technical Report No. 714, Stanford Univ., Graduate School of Business (1983).Google Scholar
Pesaran, M., and Timmermann, A.. “A Generalization of the Non-Parametric Henriksson-Merton Test of Market Timing.” Economics Letters, 44 (1994), 1–7.10.1016/0165-1765(93)00284-UCrossRefGoogle Scholar
Roll, R. “Ambiguity when Performance is Measured by the Securities Market Line.” Journal of Finance, 33 (4, 1978), 1051–1069.10.2307/2326939CrossRefGoogle Scholar
Roll, R. “A Reply to Mayers and Rice (1979).” Journal of Financial Economics, 7 (1979), 391–400.10.1016/0304-405X(79)90006-0CrossRefGoogle Scholar
Rosenberg, B.; Reid, K.; and Lanstein, R.. “Persuasive Evidence of Market Inefficiency.” Journal of Portfolio Management, 11 (1985), 9–17.10.3905/jpm.1985.409007CrossRefGoogle Scholar
Sharpe, W. “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.” Journal of Finance, 19 (1964), 425–442.10.2307/2977928Google Scholar
Sharpe, W. “Asset Allocation: Management Style and Performance Measurement.” Journal of Portfolio Management, (Winter 1992), 7–19.10.3905/jpm.1992.409394CrossRefGoogle Scholar
Treynor, J. “How to Rate Management of Investment Funds.” Harvard Business Review, 43 (01–02 1965), 63–75.Google Scholar
Treynor, J., and Mazuy, K.. “Can Mutual Funds Outguess the Market?” Harvard Business Review, 44 (07–08 1966), 131–136.Google Scholar
Wagner, J.; Shellans, S.; and Paul, R.. “Market Timing Works where it Matters Most … In the Real World.” Journal of Portfolio Management, 18 (1992), 86–90.10.3905/jpm.1992.409415CrossRefGoogle Scholar