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Jensen's alpha and the market‐timing puzzle

  • Theory predicts that market‐timing activities bias Jensen's alpha (JA). However, empirical studies have failed to find consistent evidence of this bias. We tackle this puzzle in a nested model analysis and show that the bias contains an exogenous market component that is unrelated to market‐timing skill. In a comprehensive empirical analysis of US mutual funds, we find that the timing‐induced bias in JA is mainly driven by this market component, which is uncorrelated with measured timing activities. Measures of total performance that allow for timing activities are virtually identical to JA, even if timing activities are present in the evaluated fund. Hence, we conclude that JA is a sufficient measure of total performance.

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Metadaten
Name:Bunnenberg, Sebastian
URN:urn:nbn:de:bsz:rt2-opus4-22303
DOI:https://doi.org/10.1002/rfe.1033
ISSN:1058-3300
eISSN:1873-5924
Erschienen in:Review of financial economics : RFE
Publisher:Wiley
Place of publication:Hoboken, NJ
Document Type:Article
Language:English
Year of Publication:2019
Tag:market‐timing; mutual fund performance; stock selection; total performance
Volume:37
Issue:2
Pagenumber:22
First Page:234
Last Page:255
Dewey Decimal Classification:650 Management
Open Access:Ja
Licence (German):License Logo  Open Access