Empirical Study On Volatility Timing Ability Of China's Investment Funds

Timing ability is an important index to evaluate an investment fund's performance. Previous market returns timing studies do not find significant evidence that funds time the market. In this paper, we introduce a return timing factor into Busse's volatility timing model, and employ the model to investigate whether China's investment funds should time the market. Our empirical results show that China's investment funds have significant volatility timing abilities. Comparing to passive strategy, funds reduce their market exposure during the periods of high conditional volatility. Morever, the ability of open-end funds is superior to the one of closed-end funds; while among different investment style, the volatility timing ability of funds does not take any difference. Our analysis also finds that the modified models, which take return timing factor into account, are excess to original Busse's models. In order to reflect the relation between funds volatility timing and funds performance, we introduce correlation analysis, bootstrap method and conditional performance evaluation to conduct an empirical analysis. The results indicate that the funds performance is relative to funds volatility timing, while this timing ability does not improve the funds performance. And we also give some suggestions and reasons for this phenomenon.As to empirical methods, this paper compares changes between the funds volatility timing behavior and the behavior of a randomly formed control sample which holds similar types of stocks as funds. This method is called portfolio-based analysis, which is not implied in former Chinese funds analysis. Our studies are not merely a theoretical discussion. Whatsmore, they give some new perspective on funds operation, analysis and evaluation in China's security markets. And the empirical analysis also shows that this analysis is quite fit for the intensely variable, primary market of our country.