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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Financial Markets, Volume 16, Issue 2, May 2013, Pages 279–307
This paper examines mutual fund managers' ability to time market-wide liquidity. Using the CRSP mutual fund database, we find strong evidence that over the 1974–2009 period, mutual fund managers demonstrate the ability to time market liquidity at both the portfolio level and the individual fund level. Liquidity timing predicts future fund performance and the difference in the risk-adjusted returns between top and bottom liquidity-timing funds is approximately 2% per year. Funds exhibiting liquidity-timing ability tend to have longer histories, higher expense ratios, and higher turnover rates.
The literature on the timing ability of mutual fund managers has traditionally focused on managers' ability to time market returns or volatility. There is little evidence that fund managers successfully time the market by increasing (decreasing) portfolio exposure prior to market advances (declines) (e.g., Treynor and Mazuy, 1966, Chang and Lewellen, 1984, Henriksson, 1984, Ferson and Schadt, 1996, Graham and Harvey, 1996 and Becker et al., 1999).1 On the other hand, Busse (1999) documents that fund managers demonstrate the ability to time market volatility by increasing (reducing) portfolio exposure to the market when the market is less (more) volatile. In this paper, we investigate the traditional timing issue from a new perspective by examining mutual fund managers' ability to time market liquidity. Specifically, we test whether fund managers adjust market exposure when market liquidity changes. We focus on liquidity timing for several reasons. First, there is a clear connection between market-wide liquidity and mutual fund performance. For example, during the 2008 financial crisis, massive market-wide liquidity squeezes were coupled with dramatic stock market declines. If fund managers can correctly predict future market liquidity conditions, they can adapt their portfolio exposure accordingly to alleviate losses and improve performance. As fund performance affects investor money flows and hence manager compensation, mutual fund managers are incentivized to adjust asset allocation according to market liquidity conditions. Secondly, while market returns lack sufficient persistence to be reliably predictable, market liquidity, like market volatility, is more persistent. Therefore, it might be easier for fund managers to time market liquidity than market returns. Finally, the asset pricing literature has identified market liquidity as a state variable that is important for asset pricing. For example, Acharya and Pedersen (2005) show that persistent positive shocks to liquidity predict high future liquidity, which lowers required future returns and raises contemporaneous prices; therefore, a high liquidity state is associated with high contemporaneous returns and vice versa. Given the co-movement of market liquidity and market returns, it is natural to ask whether market liquidity is an important factor for asset allocation decisions. To understand how fund managers might time market liquidity when making asset allocation decisions, consider a simple scenario in which funds either hold cash or invest in stocks. Since market liquidity co-moves with market returns, fund managers with liquidity-timing ability shift out of cash and into stocks to increase market exposure prior to higher market liquidity (and hence higher market returns). Similarly, fund managers shift out of stocks and into cash to reduce exposure to the equity market prior to more illiquid markets (and hence market declines). Based on the above intuition, if managers demonstrate the ability to time market liquidity, we expect a positive relation between funds' systematic risk (market beta) and market liquidity. Using the CRSP Survivorship-Bias-Free Mutual Fund Database, we examine mutual fund managers' liquidity-timing ability during the period of 1974–2009. In the empirical analysis, we use two measures of market liquidity to evaluate the liquidity-timing ability of fund managers: the Pastor and Stambaugh (2003) liquidity measure and the Amihud (2002) illiquidity measure. We first document significant and positive liquidity-timing ability at the portfolio level by showing that fund managers increase (reduce) portfolio exposure when the market is more liquid (illiquid). In particular, we find that when market liquidity is one standard deviation above its mean, ceteris paribus, the average mutual fund portfolio's market beta is 5.5% higher. Among funds with different investment objectives, aggressive growth funds demonstrate the most significant liquidity-timing ability, followed by growth and growth-and-income funds, while income funds do not exhibit liquidity timing ability. As aggressive growth funds tend to tilt more heavily towards small-cap stocks and thus hold more illiquid assets (Chen, Hong, Huang, and Kubik, 2004), the results suggest that funds with more illiquid holdings are more likely to successfully time market liquidity. The results are robust to the exclusion of the 1987 market crash and the 2008 financial crisis, a sub-period analysis, the use of an alternative liquidity measure, and the inclusion of a liquidity risk factor. In addition, we show that liquidity timing, as well as volatility timing documented by Busse (1999), is an important component of the strategies of active mutual fund managers. We also evaluate the liquidity timing ability of mutual fund managers at the individual fund level using a bootstrap approach similar to that of Jiang, Yao, and Yu (2007). The bootstrap analysis indicates that the liquidity-timing ability of top fund managers cannot simply be attributed to luck. In addition, we demonstrate that liquidity timing predicts future fund performance. Sorting funds based on the liquidity timing coefficients every year, we find that funds in the highest decile outperform those in the lowest decile by approximately 2% per year during the 1974–2009 period. Finally, we examine the cross-sectional relationship between liquidity-timing ability and fund characteristics and document that liquidity timers tend to have longer histories, higher expense ratios, and higher turnover rates. This paper is part of the growing mutual fund timing literature pioneered by Treynor and Mazuy (1966). In particular, it is related to the literature on conditional mutual fund performance (e.g., Ferson and Schadt, 1996, Christopherson et al., 1998, Becker et al., 1999 and Ferson and Qian, 2004) and volatility timing (e.g., Busse, 1999). These studies examine fund managers' ability to time market returns conditional on a set of publicly available information variables or their ability to time market volatility. In contrast, we investigate fund managers' ability to time market liquidity, thus offering a new perspective on the traditional timing issue. The remainder of the paper is organized as follows: Section 2 describes our mutual fund data and the liquidity measures. Section 3 presents the portfolio-level analysis of liquidity timing. In Section 4, we use a bootstrap approach to examine liquidity-timing ability at the individual fund level, evaluate the out-of-sample performance of liquidity-timing funds, and investigate the cross-sectional relationship between liquidity-timing ability and fund characteristics. Section 5 concludes.
نتیجه گیری انگلیسی
In this paper, we investigate the liquidity-t iming ability of mutual funds by studying how fund managers change market exposure when market liquidity changes. We find that fund managers demonstrate the ability to time m arket liquidity at both the port folio level and the individual fund level — they increase (reduce) market exposure w hen the market is more liquid (illiquid). We also find that among funds with different inv estment objectives, aggressive growth funds demonstrate the most significant liquidity-tim ing ability, followed by growth and growth-and- income funds, while income funds do not exhibit li quidity-timing ability. The results are robust to the exclusion of the 1987 market crash and th e 2008 financial crisis, a s ub-period analysis, the use of an alternative liquidity measure, an d the inclusion of a liquidity risk factor. In addition, liquidity timing is an important component of the strategies of active mutual fund managers after controlling for volatility timi ng. We also find that such ability predicts funds’ future risk-adjusted performance. Finally, liqui dity-timing funds tend to have longer histories, higher expense ratios, and higher turnover rates. Our paper makes several important contributions to the literature on mutual fund managers’ timing ability. First, we examine the traditional timing issue from a new perspective by focusing on liquidity timing rather than return or volatility timing. This new focus enables us to better understand the asset allocation decisions of mutual fund managers. In particular, we show that fund managers increase (reduce) portfolio exposure prior to more liquid (illiquid) markets. As such, actively managed funds could potentially provide investors with valuable protection when market liquidity deteriorates, which is particularly important in times of crisis when liquidity risk is a major concern for investors. Second, we find that liquidity-timing strategies pay off in the form of higher future risk- adjusted performance. As risk-adjusted performance affects fund flows (e.g., Sirri and Tufano, 1998 ), our results have significant implications for manager compensation. Finally, our evidence reveals the important role that market liquidity plays in the asset allocation decisions active mutual fund managers make