This paper proposes a novel approach to determine whether mutual funds time the market. The proposed approach builds on a heterogeneous agent model, where investors switch between cash and stocks depending on a certain switching rule. This approach is more flexible, intuitive, and parsimonious than the traditional convexity approach. Applying this model to a sample of 400 US equity mutual funds, we find that 41.5% of the funds in our sample have negative market timing skills and only 3.25% positive skills. Twenty percent of funds apply a forward-looking approach in deciding on market timing, and 13.75% a backward-looking approach. We find that growth funds tend to be more backward-looking and income funds tend to be more forward-looking.

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Quantitative Finance
Erasmus Research Institute of Management

Frijns, B., Gilbert, A., & Zwinkels, R. (2013). Market timing ability and mutual funds: a heterogeneous agent approach. Quantitative Finance, 13(10), 1613–1620. doi:10.1080/14697688.2013.791749