Mutual fund performance: timing and persistence

Yin, Zhengnan

Mutual fund performance: timing and persistence

cbnd

Date

2023-04-24

Authors

Yin, Zhengnan

Publisher

University College Cork

Abstract

We apply the nonparametric methodology of Jiang (2003) to examine whether bond mutual funds can time the bond market by adjusting their portfolios' market exposure based on anticipated market movement. This approach has several advantages over the widely used regression-based tests such as Treynor-Mazuy(1966) and Henrikkson and Merton (1981). Using a large sample free of survivorship bias from the US, UK, and China, we find some evidence of positive market timing of bond funds at the individual fund level. On average, bond funds show neutral to slightly negative market timing ability. After controlling for public information, we find that a number of bond funds successfully time the market based on private timing signals. In terms of categories, we find strong evidence of positive market timing for Government bond funds as a group, consistent with the findings of Huang and Wang(2014). We apply a nonparametric methodology to test the liquidity timing skills across individual equity mutual funds in three countries(the US, UK, and China). We calculate the monthly stock market liquidity using simple averages and the asymptotic principle analysis(APCA) method based on six stock liquidity measures. Using an across-measure of market liquidity from APCA, we find a relatively small number of funds demonstrate statistically positive liquidity timing skills at a 5% significance level for the period of 2000-2021. After controlling the lagged market liquidity information, we still find a small number of mutual funds that have conditional liquidity timing ability using the nonparametric method. We analyze the performance of asset allocation funds based on the best-fit multifactor model, including both stock and bond market factors. Using US and UK data, we find asset allocation funds do not outperform their benchmarks on average. We use both Treynor and Mazuy(1966) and Henrikkson and Merton (1981) methods to test the stock and bond market timing ability of allocation funds. As groups, US and UK asset allocation funds have neutral to perverse stock market timing ability. However, UK allocation funds have positive bond market timing ability. At the individual fund level, there is a range of funds that demonstrate positive stock market timing as well as bond market timing ability for both markets. We then test the performance persistence of these funds using an innovative bootstrap method to control for the non-normality issue in fund returns. We find little evidence of performance persistence for US funds for both decile portfolios and small-size portfolios. There is some evidence of performance persistence for UK funds using decile and small-size portfolios.

Description

Controlled Access

Keywords

Mutual fund performance , Bond funds , Market timing , Nonparametric test , Liquidity timing , Liquidity , Principal component analysis , Asset allocation fund , Performance persistence , Bootstrap

Citation

Yin, Z. 2023. Mutual fund performance: timing and persistence. PhD Thesis, University College Cork.