Hostname: page-component-7479d7b7d-c9gpj Total loading time: 0 Render date: 2024-07-09T07:02:17.113Z Has data issue: false hasContentIssue false
  • English
  • Français

Performance Evaluation of Market Timers: Theory and Evidence

Published online by Cambridge University Press:  06 April 2009

Alex Kane  and
Stephen Gary Marks
Get access Rights & Permissions [Opens in a new window]

Abstract

Previous investigators have shown that the Sharpe measure of the performance of a managed portfolio may be flawed when the portfolio manager has market timing ability. Herein we develop the exact conditions under which the Sharpe measure will completely and correctly order market timers according to ability. The derived conditions are necessary, sufficient, and observable. We compare these derived conditions to empirical estimates of actual market conditions and find that, under typical market conditions, the practice of using quarterly portfolio return data will frequently result in a failure of the Sharpe measure to order timers according to ability. We show, however, that such failures can be greatly reduced by more frequent sampling of managed portfolio returns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 23 , Issue 4 , December 1988 , pp. 425 - 435
Copyright
Copyright © School of Business Administration, University of Washington 1988

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A. R., and Ross, S. A.. “Measuring Investment Performance in a Rational Expectations Equilibrium Model.” Journal of Business, 58 (01 1985), 1–26.CrossRefGoogle Scholar
Chang, E. C., and Lewellen, W. G.. “Market Timing and Mutual Fund Investment Performance.” Journal of Business, 57 (01 1984), 57–72.CrossRefGoogle Scholar
Dybvig, P. H., and Ross, S. A.. “Differential Information and Performance Measurement Using a Security Market Line.” Journal of Finance, 40 (01 1985), 393–399.Google Scholar
Grant, D. “Market Timing and Portfolio Management.” Journal of Finance, 33 (09 1978), 1119–1131.Google Scholar
Grinblatt, M., and Titman, S.. “Portfolio Performance Evaluation: Old Issues and New Insights.” Working Paper, Graduate School of Management, UCLA (05 1986).Google Scholar
Henriksson, R. D. “Market Timing and Mutual Fund Performance.” Journal of Business, 57 (01 1984), 73–96.CrossRefGoogle Scholar
Henriksson, R. D., and Merton, R. C.. “On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills.” Journal of Business, 54 (10 1981), 513–533.CrossRefGoogle Scholar
Kane, A.; Lee, Y. K.; and Marks, S.. “The Forecasting Ability of Money Market Managers and Its Economic Value.” Working Paper, Boston University (1987).Google Scholar
Merton, R. C. “On Estimating the Expected Return on the Market.” Journal of Financial Economics, 8 (12 1980), 330–333.CrossRefGoogle Scholar
Merton, R. C. “On Market Timing and Investment Performance. I. An Equilibrium Theory of Value for Market Forecasts.” Journal of Business, 54 (07 1981), 363–406.Google Scholar
Sharpe, W. “Mutual Fund Performance.” Journal of Business, 39 (01 1966), 119–138.CrossRefGoogle Scholar