Nonparametric tests for market timing ability using daily mutual fund returns

Abstract

When using daily mutual fund returns to study market timing ability, heavy tails and heteroscedasticity significantly challenge the existing methods. We propose a weighted nonparametric measure and test for market timing. The test finds different results from the traditional parametric inference concerning timing. By examining the holding characteristics of the funds with different levels of timing ability, we find that funds with positive timing ability hold stocks with lower trading frictions. We find evidence of a tradeoff between market timing ability and stock picking skill after excluding funds with zero timing ability, which is robust to different benchmark models.