Study On Market Timing Ability Of Funds Based On Cash Flows

There were only five funds in1998, and1019funds at the end of2011in China. The fund net asset value increased from10.74billion yuan in1998to2,191.84million yuan in2011. The growth of fund size is approximately200times in13years. The reason why the fund can play an increasingly important role in the financial industry is that they are professional. Therefore, we must answer a question whether the Fund has the ability to obtain excess return. There are a lot of researches on this problem.Early studies focuses on market return timing ability. Treynor and Mazuy(1966) study stock selecting ability and market return timing ability using a quadratic (T-M model), and believe that American funds have poor performance and poor return timing ability. Henriksson and Merton(1981) uses option to explain market return timing ability and build H-M model. They also find no market return timing ability. Busse(1999) is the first to study the market volatility timing ability. He uses daily returns to examine how mutual funds managers respond to market volatility.This paper examines the market return timing ability and market volatility timing ability of with all of open-end fund in January2004to December2010in China, and comparing the performance of funds with net cash inflows (PCF) to those with net cash outflows (NCF).We combined CAPM model, Fama-French three factor model, Carhart four factor model with the H-M model and Busse model respectively, then we get those market return timing joint models of the CAPM-HM model, FF3-HM model and C4-HM model, and those volatility return timing joint models of CAPM-B model, FF3-B model and C4-B model, and the joint timing model of return and volatility with C4-HM-B model.Form Risk-adjusted performance metrics, including the Sharpe ratio, Treynor index, information ratio, we find PCF funds and NCF funds can obtain excess return, as they bear systemic risk or total risk. However PCF funds also can get benefit by taking non-systemic risk, while NCF funds cannot get benefit by taking non-systemic risk.Evidence by those above models, we believe that PCF funds have a significant stock selecting ability and NCF funds obviously don’t have stock selecting ability if those joint models have not consider market return timing ability factor. However, none of the fund categories have a significant stock selecting ability when the model contains market return timing ability factor. Based on different models with the measurement factor of return timing ability, there are obvious differences between these two types of funds. That is, PCF funds have market return timing ability and NCF funds do not have market return timing ability, though the former does not significantly and the latter is significant.Although PCF funds do not have market volatility timing ability and NCF funds have significant ability to time market volatility form timing ability model, PCF funds and NCF funds do not have timing behavior according to A3BM Model. So we think neither PCF funds nor NCF funds have significant ability to time market volatility.Therefore, we conclude that fund cash flows have the ability to time market return, but do not have the ability to time market volatility.