A nonparametric test of market timing

In this paper, we propose a nonparametric test for market timing ability and apply the analysis to a large sample of mutual funds that have different benchmark indices. The test statistic is formed to proxy the probability that a manager loads on more market risk when the market return is relatively high. The test (i) only requires the ex post returns of funds and their benchmark portfolios; (ii) separates the quality of timing information a money manager possesses from the aggressiveness with which she reacts to such information; and (iii) is robust to different information and incentive structures, as well as to underlying distributions. Overall, we do not find superior timing ability among actively managed domestic equity funds for the period of 1980–1999. Further, it is difficult to predict funds’ timing performance from their observable characteristics. D 2003 Elsevier Science B.V. All rights reserved. JEL classification: G1; C1