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Why is timing perverse?

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  • Juan Carlos Matallín-Sáez
  • David Moreno
  • Rosa Rodríguez

Abstract

The existence of negative market timing, even for passive portfolios, poses a relevant puzzle when assessing portfolio management. In this paper, we develop a simple theoretical model so as to explain why such perverse market timing might occur and why those stocks with the lowest beta in upward markets exhibit pronounced negative timing. Our explanation is based on the existence of higher correlations of stocks in down markets than in up markets. We find that changes in beta, which drives timing, has four components; however, just two of these, mean covariance shift and covariances dispersion map , serve to explain the asymmetric behavior across stocks. We find that a high percentage of the negative market timing ability identified for mutual funds in the literature could be explained by this bias.

Suggested Citation

  • Juan Carlos Matallín-Sáez & David Moreno & Rosa Rodríguez, 2015. "Why is timing perverse?," The European Journal of Finance, Taylor & Francis Journals, vol. 21(15), pages 1334-1356, December.
    • Handle: RePEc:taf:eurjfi:v:21:y:2015:i:15:p:1334-1356
    DOI: 10.1080/1351847X.2014.935870
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    Cited by:

    1. El-Masry, Ahmed A. & de Mingo-López, Diego Víctor & Matallín-Sáez, Juan Carlos & Tortosa-Ausina, Emili, 2016. "Environmental conditions, fund characteristics, and Islamic orientation: An analysis of mutual fund performance for the MENA region," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 174-197.
    2. Andreu, Laura & Matallín-Sáez, Juan Carlos & Sarto, José Luis, 2018. "Mutual fund performance attribution and market timing using portfolio holdings," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 353-370.

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