Research and publications
The Alpha of a Market Timer
Portfolio managers claim to be able to generate abnormal returns through either superior asset selection or market timing. The Treynor and Mazuy (TM) model is the most used return-based approach to isolate market timing skills, but all existing corrections of the regression intercept can be manipulated by a manager who can trade derivatives. This paper revisits the TM model by applying the original option replication approach proposed by Merton. It exploits both the linear and the quadratic coefficients of the TM regression to assess the replicating cost of the cheapest option portfolio with the same convexity. The application of the new correction on two samples of market timing funds delivers particularly encouraging empirical results.
Author(s):
Georges Hübner
Summary:
Portfolio managers claim to be able to generate abnormal returns through either superior asset selection or market timing. The Treynor and Mazuy (TM) model is the most used return-based approach to isolate market timing skills, but all existing corrections of the regression intercept can be manipulated by a manager who can trade derivatives. This paper revisits the TM model by applying the original option replication approach proposed by Merton. It exploits both the linear and the quadratic coefficients of the TM regression to assess the replicating cost of the cheapest option portfolio with the same convexity. The application of the new correction on two samples of market timing funds delivers particularly encouraging empirical results.
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Register/Log in| Type : | Working paper |
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| Date : | 01/03/2011 |
| Keywords : |
Performance |
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