Market timing ability and mutual funds: a heterogeneous agent approach

Frijns, B
Gilbert, A
Zwinkels, RCJ
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Taylor & Francis

This paper proposes a novel approach to determine whether mutual funds time the market. The proposed approach builds on a heterogeneous agent model, where investors switch between cash and stocks depending on a certain switching rule. This represents a more flexible, intuitive, and parsimonious approach. The traditional market timing models are essentially a special case of our model with contemporaneous switching rule. Applying this model to a sample of 400 US equity mutual funds, we find that 41.5% of the funds in our sample have negative market timing skills and only 3.25% positive skills. 20% of funds apply a forward:looking approach in deciding on market timing, and 13.75% a backward looking approach. We also note that market timing differs considerably over fund styles.

Mutual funds , Market timing , Heterogeneous agents models
Quantitative Finance, Vol. 13 (10), pp. 1613-1620.
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