The performance of Chinese equity funds: An extension of DGTW model

Abstract

This study is an extension of Daniel et al. (1997, DGTW) for fund performance. Our extended DGTW model re-decomposes characteristic selectivity (CS) and characteristic timing (CT) into rebalancing and holding parts, and average style (AS) into excess AS over market and market return. Our model is applied to evaluate the performance of Chinese equity funds, and the empirical findings are as follows. First, the superior selectivity of Chinese fund managers depends on holding CS, however, their inferior timing ability is due to both rebalancing and holding CTs. Second, excess AS over market indicates poor style selectivity among fund managers. Third, DGTW (1997) reveals good timing ability in 2008 and 2011 when the stock market was bearish. The extended DGTW model shows that superior CTs (inferior CSs) in 2008 and 2011 result from both superior (inferior) rebalancing and holding abilities of fund managers. Finally, style selectivity is not found generally, but in bearish markets, implying that excess AS over market seems to be positively related to CT.