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Detecting mutual fund timing ability using the threshold model

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  • Ping-Huang Chou
  • Huimin Chung
  • Erh-Yin Sun

Abstract

This paper proposes a new method based on threshold regression to test mutual fund market-timing abilities. The traditional Henriksson and Merton model is shown to represent only a special case within the proposed model. The potential bias of using the traditional model is demonstrated and it is argued that the proposed model provides more accurate inferences on the market-timing effects of mutual funds. The empirical results for a set of randomly-selected US mutual funds indicate the superior performance of the proposed method in detecting the market-timing ability.

Suggested Citation

  • Ping-Huang Chou & Huimin Chung & Erh-Yin Sun, 2005. "Detecting mutual fund timing ability using the threshold model," Applied Economics Letters, Taylor & Francis Journals, vol. 12(13), pages 829-834.
    • Handle: RePEc:taf:apeclt:v:12:y:2005:i:13:p:829-834
    DOI: 10.1080/13504850500358850
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    References listed on IDEAS

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    1. Awudu Abdulai, 2002. "Using threshold cointegration to estimate asymmetric price transmission in the Swiss pork market," Applied Economics, Taylor & Francis Journals, vol. 34(6), pages 679-687.
    2. Henriksson, Roy D & Merton, Robert C, 1981. "On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills," The Journal of Business, University of Chicago Press, vol. 54(4), pages 513-533, October.
    3. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    4. Chang, Eric C & Lewellen, Wilbur G, 1984. "Market Timing and Mutual Fund Investment Performance," The Journal of Business, University of Chicago Press, vol. 57(1), pages 57-72, January.
    5. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-430, March.
    6. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    7. Fabozzi, Frank J & Francis, Jack C, 1979. "Mutual Fund Systematic Risk for Bull and Bear Markets: An Empirical Examination," Journal of Finance, American Finance Association, vol. 34(5), pages 1243-1250, December.
    8. Nicolas P. B. Bollen & Jeffrey A. Busse, 2001. "On the Timing Ability of Mutual Fund Managers," Journal of Finance, American Finance Association, vol. 56(3), pages 1075-1094, June.
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    Cited by:

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    2. Woodward, George & Brooks, Robert, 2009. "Do realized betas exhibit up/down market tendencies?," International Review of Economics & Finance, Elsevier, vol. 18(3), pages 511-519, June.

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