Liquidity Timing Ability of Fund Managers under Changing Market Dynamics

We examine the liquidity timing ability of Turkish variable fund managers during 2011-2018, and how this ability is affected by the environmental factors such as the technological advancement level, the presence of derivatives market, the growth in the overall economy, the level of market openness, and the performance of portfolios for bond, gold, real estate, foreign exchange, emerging markets. We use interaction variables within a panel data framework. We find strong evidence of the liquidity timing ability of mutual fund managers even after controlling for environmental factors. The nature of the interactions for most of the control factors with liquidity timing ability is strongly significant and differs based on the factor.

Keywords:

Mutual Funds, Liquidity Timing, Amihud Ratio, Economic Growth, Technology, Openness, Derivatives Market, Bond, Currency, Gold, Real Estate, Emerging Market Panel Data, Interaction Variables,

PDF

___

ACHARYA, V. V., & PEDERSEN, L. H. (2005). Asset pricing with Liquidity Risk. Journal of Financial Economics, 77(2), 375-410.
AMIHUD, Y. (2002). Illiquidity and Stock Returns: Cross-Section and Time-Series Effects. Journal of Financial Markets, 5(1), 31-56.
BALTAGI, B. (2008). Econometric Analysis of Panel Data, 4th Ed. John Wiley & Sons: England.
BALTAGI, B. H., BRESSON, G., & PIROTTE, A. (2007). Panel Unit Root Tests and Spatial Dependence. Journal of Applied Econometrics, 22(2), 339-360.
BAZGOUR, T., BODSON, L., & SOUGN, D. (2017). What Style Liquidity Timing Skills Do Mutual Fund Managers Possess? Financial Review, 52(4), 597-626.
BECK, N., & KATZ, J. N. (1995). What to Do (and Not to Do) with Time-Series Cross-Section Data. American Political Science Review, 89(3), 634-647.
BELSLEY, D. A., KUH, E., & WELSH, R. E. (1980). Regression Diagnostics: Identifying Influential Data and Sources of Collinearity. John Wiley & Sons: New Jersey.
BRSA. (2016). Banking Regulation and Supervision Agency. Accessed online at: http://www.bddk.org.tr/Data-Category/Banking-Sector-Data/13
BUSSE, J. A. (1999). Volatility Timing in Mutual Funds: Evidence from Daily Returns. The Review of Financial Studies, 12(5), 1009-1041.
CAO, C., CHEN, Y., LIANG, B., & LO, A. W. (2013). Can Hedge Funds Time Market Liquidity? Journal of Financial Economics, 109(2), 493-516.
CAO, C., SIMIN, T. T., & WANG, Y. (2013). Do Mutual Fund Managers Time Market Liquidity? Journal of Financial Markets, 16(2), 279-307.
CHEN, L.-W., ADAMS, A., & TAFFLER, R. (2013). What Style-Timing Skills Do Mutual Fund “Stars” Possess? Journal of Empirical Finance, 21, 156-173.
CBRT. (2019, September 19). Central Bank Republic of Turkey. Accessed online at: https://www.tcmb.gov.tr
CMB. (2018). Capital Markets Board Report: Monthly Statistics of Capital Markets Board of Turkey. Accessed online at: http://www.spk.gov.tr/SiteApps/Yayin/AylikIstatistikBultenleri
DICKEY, D. A., & FULLER, W. A. (1979). Distribution of The Estimators for Autoregressive Time Series with A Unit Root. Journal of the American Statistical Association, 74(366a), 427-431.
FAMA, E. F., & FRENCH, K. R. (1993). Common Risk Factors in The Returns on Stocks and Bonds. Journal of Financial Economics, 33(1), 3-56.
FISHER, R. (1932). Statistical Methods for Research Workers. Edinburgh: Oliver and Boyd, 1925
FONG, K. Y., HOLDEN, C. W., & TRZCINKA, C. A. (2017). What are The Best Liquidity Proxies for Global Research? Review of Finance, 21(4), 1355-1401.
FORAN, J., & O’SULLIVAN, N. (2017). Mutual Fund Skill in Timing Market Volatility and Liquidity. International Journal of Finance & Economics, 22(4), 257-273.
GREENE, W. H. (2003). Econometric Analysis. Pearson Education India.
HANSEN, C. B. (2007B). Generalized Least Squares Inference in Panel and Multilevel Models with Serial Correlation and Fixed Effects. Journal of Econometrics, 140(2), 670-694.
HENRIKSSON, R. D., & MERTON, R. C. (1981). On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills. Journal of Business, 513-533.
HO, T., & STOLL, H. R. (1981). Optimal Dealer Pricing Under Transactions and Return Uncertainty. Journal of Financial Economics, 9(1), 47-73.
HSIAO, C. (2007). Panel Data Analysis-Advantages and Challenges. Test. 16(1), 1-22. University of Southern California
HUBERMAN, G., & HALKA, D. (2001). Systematic Liquidity. Journal of Financial Research, 24(2), 161-178.
JAGANNATHAN, R., & KORAJCZYK, R. A. (1986). Assessing The Market Timing Performance of Managed Portfolios. Journal of Business, 217-235.
JIANG, W. (2003). A Nonparametric Test of Market Timing. Journal of Empirical Finance, 10(4), 399-425.
LIANG, K.-Y., & ZEGER, S. L. (1986). Longitudinal Data Analysis Using Generalized Linear Models. Biometrika, 73(1), 13-22.
LIPPMAN, S. A., & MCCALL, J. J. (1986). An Operational Measure of Liquidity. The American Economic Review, 76(1), 43-55.
LO, A. W., & WANG, J. (2000). Trading Volume:Definitions, Data Analysis, and Implications of Portfolio Theory. The Review of Financial Studies, 13(2), 257-300.
MENDELSON, H. (1982). Market Behavior in A Clearing House. Econometrica: Journal of The Econometric Society, 1505-1524.
MENDELSON, H. (1985). Random Competitive Exchange: Price Distributions and Gains from Trade. Journal of Economic Theory, 37(2), 254-280.
MENDELSON, H. (1986). Liquidity and Stock Returns. Financial Analyst Journal, (42).
MILNE, F., & SMITH, C. W. (1980). Capital Asset Pricing with Proportional Transaction Costs. Journal of Financial and Quantitative Analysis, 15(2), 253-266.
ØDEGAARD, B. A. (2018). Liquidity–The Amihud Illiquidity Estimator.
PASTOR, L., & STAMBAUGH, R. F. (2002). Liquidity Risk and Expected Stock Returns” Forthcoming in The Journal of Political Economy. Journal of Political Economy.
PUKKI, M. (2012). Do Mutual Funds Time Market Liquidity? A Study on US Mutual Fund Performance. Aalto University
REINGANUM, M. R. (1981). Misspecification of Capital Asset Pricing: Empirical Anomalies Based on Earnings' Yields and Market Values. Journal of Financial Economics, 9(1), 19-46.
RÖTTGER, D., & MELENBERG, B. (2013). The Pricing of Liquidity Risk Around The World.
SWINKELS, L., & TJONG-A-TJOE, L. (2007). Can Mutual Funds Time Investment Styles? Journal of Asset Management, 8(2), 123-132.
TREYNOR, J. L. (1980). If You Can Forecast The Market, You Don't Need Anything Else. Editor's Comment. Financial Analysis Journal, January-February, 2.
TREYNOR, J., & MAZUY, K. (1966). Can Mutual Funds Outguess The Market? Harward Business Review, 44 (4), 131-136.
WALL, L. D. (2018). Financial Stability Implications of New Technology-Federal Reserve Bank of Atlanta.
WANG, Y. (2008). Essays on Mutual Funds, Ph.D. Thesis, The Pennsylvania State University
WATTANATORN, W., PADUNGSAKSAWASDI, C., CHUNHACHINDA, P., & NATHAPHAN, S. (2020). Mutual Fund Liquidity Timing Ability in the Higher Moment Framework. Research in International Business and Finance, 51, 101105.
WHITE, H., & DOMOWITZ, I. (1984). Nonlinear Regression With Dependent Observations. Econometrica. Journal of the Econometric Society, 143-161.
YEŞILDAĞ, E. (2008). Measurement of The Relationship Between Liquidity and Stock Returns: ISE Application (Master's Thesis, Adnan Menderes University). Social Sciences Institute.