Topic:Cashflow timing vs. discount-rate timing: A decomposition of mutual fund market-timing skills
Speaker:Russ Wermers, University of Maryland at College Park
Time:Monday, 10 July, 10:00-11:30
Place:Room 217, Guanghua Building 2
We decompose market timing skills into talents that exploit cashflow and discount-rate news, the two components of market returns. This differentiation reveals that the average U.S. domestic equity mutual fund has timing skills of 1.2% per year: cashflow timing contributes 2% per year, while discount-rate timing generates -0.8% per year. Top-quintile ranked timing funds (funds with the highest sum of the two timing ability components) exhibit about 2.5% market timing abnormal returns over the next year. Our findings suggest that the misspecification of market timing skills accounts for the failure of prior research to identify funds with timing abilities.
Russ Wermers is Professor of Finance and Director of the Center for Financial Policy (CFP) at the Smith School of Business, University of Maryland at College Park, where he won a campus-wide teaching award during 2005 and a Krowe Teaching Award (within the Smith Business School) during 2013. As Director, Professor Wermers guides the CFP in its mission of generating research that informs financial policy in the private and public sectors. His main research interests include studies of the efficiency of securities markets, as well as the role of institutional investors in setting stock prices. In addition, he studies and teaches quantitative equity strategies, and is currently researching microfinance institutions in Thailand. Most notably, his past research has developed new approaches to measuring and attributing the performance of mutual funds, pension funds, and hedge funds, which, among other applications, can be used to identify superior active funds. Professor Wermers also studies the investment behavior of these asset managers, as well as the impact of their trades on financial markets. His papers have been published in leading scholarly journals, such as The American Economic Review and The Journal of Finance. His article on mutual fund “herding” and stock prices (Journal of Finance, 1999) won the NYSE Award for the Best Paper on Equity Trading in 1995. His coauthored article on mutual fund performance was a finalist for the Smith-Breeden Award for the Best Paper in the Journal of Finance during 2006/2007. Professor Wermers consults for the hedge fund, pension fund, and mutual fund industries. He is coauthor of a book on the latest scientific approaches to performance evaluation and attribution of professional fund managers, written for academics and practitioners (published in December 2012). He received his Ph.D. from the University of California, Los Angeles, in December 1995.
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