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Optimal Timing in Trading Japanese Equity Mutual Funds: Theory and Evidence

Author

Listed:
  • Hiroatsu Tanaka

    (University of Tokyo)

  • Naohiko Baba

    (Bank of Japan)

Abstract

This paper provides both theoretical and empirical analyses of market participants' optimal decision-making in trading Japanese equity mutual funds. First, we build an intertemporal decision-making model under uncertainty in the presence of transaction costs. This setting enables us to shed light on the investors' option to delay investment. A comparative analysis shows that an increase in uncertainty over the expected rate of return on mutual funds has a negative impact not only on market participants' buying behavior but on their selling behavior. Also, a several percent increase in front-end loads and redemption fees is likely to change the optimal holding ratio of mutual funds in investors' portfolios, by up to 10 percent. Second, we empirically examine the theoretical implications using daily transaction data of selected equity mutual funds in Japan. By estimating a panel data model, we conclude that for the sample period, from August 2000 to July 2001, investment behavior has been rational in light of our theoretical model. Our results suggest that investors are likely to rationally postpone their purchases of equity mutual funds under the present circumstances of low expected returns, high degree of uncertainty, and high trading costs.

Suggested Citation

  • Hiroatsu Tanaka & Naohiko Baba, 2003. "Optimal Timing in Trading Japanese Equity Mutual Funds: Theory and Evidence," Bank of Japan Working Paper Series 03-E-2, Bank of Japan.
    • Handle: RePEc:boj:bojwps:03-e-2
    as

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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2003/data/wp03e02.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Yuichiro Ito & Yasutaka Takizuka & Shigeaki Fujiwara, 2017. "Portfolio Selection by Households: An Empirical Analysis Using Dynamic Panel Data Models," Bank of Japan Working Paper Series 17-E-6, Bank of Japan.

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