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Mutual fund skill in timing market volatility and liquidity

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  • Jason Foran
  • Niall O'Sullivan

Abstract

We investigate both market volatility timing and market liquidity timing for the first time among UK mutual funds. We find strong evidence that a small percentage of funds time market volatility successfully, that is, when conditional market volatility is higher than normal, systematic risk levels are lower. The evidence around market liquidity timing ability is similar although it is slightly less prevalent compared to volatility timing. Here, funds lower the fund market beta in anticipation of reduced market liquidity. We also find a positive relation between liquidity timing ability and fund abnormal performance where skilled liquidity timers outperform unskilled timers by around 3% p.a.—though this finding is driven by poor liquidity timing funds going on to yield negative alpha. However, despite the evidence of volatility and liquidity timing ability among funds, we fail to find in support of persistence in this timing. We find little evidence supporting market return timing ability.

Suggested Citation

  • Jason Foran & Niall O'Sullivan, 2017. "Mutual fund skill in timing market volatility and liquidity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 22(4), pages 257-273, October.
    • Handle: RePEc:wly:ijfiec:v:22:y:2017:i:4:p:257-273
    DOI: 10.1002/ijfe.1580
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    Cited by:

    1. Mahfooz Alam & Valeed Ahmad Ansari, 2020. "Mutual fund managers’ market timing abilities: Indian evidence," Journal of Asset Management, Palgrave Macmillan, vol. 21(4), pages 342-354, July.
    2. Jun Gao & Sheng Zhu & Niall O’Sullivan & Meadhbh Sherman, 2019. "The Role of Economic Uncertainty in UK Stock Returns," JRFM, MDPI, vol. 12(1), pages 1-16, January.
    3. Mahfooz Alam & Valeed Ahmad Ansari, 0. "Mutual fund managers’ market timing abilities: Indian evidence," Journal of Asset Management, Palgrave Macmillan, vol. 0, pages 1-13.
    4. Wattanatorn, Woraphon & Padungsaksawasdi, Chaiyuth & Chunhachinda, Pornchai & Nathaphan, Sarayut, 2020. "Mutual fund liquidity timing ability in the higher moment framework," Research in International Business and Finance, Elsevier, vol. 51(C).
    5. Sishi Yue & Dayong Dong & Fengyun Wu & Zuoping Xiao, 2023. "More pay more gain?—Empirical research on fund management corporation visiting listed company and its fund performance," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 169-176, January.
    6. Zhu, Sheng & Gao, Jun & Sherman, Meadhbh, 2020. "The role of future economic conditions in the cross-section of stock returns: Evidence from the US and UK," Research in International Business and Finance, Elsevier, vol. 52(C).

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