Measuring mutual fund asymmetric performance in changing market conditions: evidence from a Bayesian threshold model

Abstract

We propose a Bayesian three-regime threshold four-factor model to compare the asymmetric risk adjustment between the transitions from neutral to downside markets and those from neutral to upside markets and investigate the performance of mutual funds in changing market conditions. We show that not only fund managers have asymmetric timing ability but three-regime models are more powerful and exhibit significant timing ability more often than two-regime models. In addition, we use panel data model to examine fund investors’ behaviour and the relationships between fund performances and characteristics. Empirical results suggest that investor's behaviour is positively associated with past selectivity performances and fund sizes, while it is negatively correlated to past turnover, load charges and expenses. In addition, funds with large contemporaneous net cash flows will result in better upside market timing ability but worse downside market timing ability.

Keywords:

• Bayesian
• market timing performance
• selectivity performance
• threshold model

JEL Classification:

• C11
• C23
• G11
• G12

Notes

¹ This can also be interpreted as that the fund manager does not have superior stock selection ability and expert market timing skill.

² This model can be viewed as an extension of Merton–Henriksson (1981) model. Here, we also allow that funds' abnormal returns are different between up and down markets and assume abnormal return with a time-varying heteroscedasticity property.

³ The daily unconditional volatility for the fund p in the jth regime is equal to