Nonparametric Tests for Market Timing Ability Using Daily Mutual Fund Returns

When using daily mutual fund returns to study market timing ability, heavy tails and heteroscedasticity significantly challenge the existing methods. We propose a weighted nonparametric measure and test for market timing. The test finds that the traditional parametric inference misclassifies about 49% of funds. Examining the holding characteristics of the funds with different levels of timing ability, we find that funds with positive timing ability hold stocks with lower trading frictions. We find strong evidence of a tradeoff between market timing ability and stock picking skill after excluding funds with zero timing ability. This conclusion is robust to different benchmark models