Artificial Market Timing in Mutual Funds

Journal of Financial and Quantitative Analysis, Forthcoming

78 Pages Posted: 30 Apr 2020 Last revised: 9 Sep 2023

See all articles by Jeffrey A. Busse

Jeffrey A. Busse

Emory University - Department of Finance

Jing Ding

Tongji University - School of Economics and Management

Lei Jiang

Tsinghua University

Yuehua Tang

University of Florida - Department of Finance

Date Written: June 17, 2022

Abstract

We document statistically significant relations between mutual fund betas and past market returns driven by fund feedback trading. Against this backdrop, evidence of “artificial” market timing emerges when standard market timing regressions are estimated across periods that span time variation in fund systematic risk levels, as is typical. Artificial timing significantly explains the inverse relation between timing model estimates of market timing and stock selectivity. A fund’s feedback trading relates to its past performance and remains significant after accounting for trading on momentum. Fund flows suggest that investors value feedback trading, which helps hedge downside risk during bear markets.

Keywords: Feedback trading, mutual funds, artificial timing, transaction costs, fund performance

JEL Classification: G11, G23

Suggested Citation

Busse, Jeffrey A. and Ding, Jing and Jiang, Lei and Tang, Yuehua, Artificial Market Timing in Mutual Funds (June 17, 2022). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3554763 or http://dx.doi.org/10.2139/ssrn.3554763

Jeffrey A. Busse

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-0160 (Phone)
404-727-5238 (Fax)

Jing Ding

Tongji University - School of Economics and Management ( email )

Siping Road 1500
Shanghai, Shanghai 200092
China

Lei Jiang (Contact Author)

Tsinghua University ( email )

Beijing, 100084
China

Yuehua Tang

University of Florida - Department of Finance ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

HOME PAGE: http://sites.google.com/site/yuehuatang

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