Effects of asymmetric information on market timing in the mutual fund industry

Jacinta Nwachukwu, Vanessa S Tchamyou, Simplice Asongu

Research output: Contribution to journalArticle

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Abstract

The paper investigates the effects of information asymmetry (between the realised return and the expected return) on market timing in the mutual fund industry. For the purpose, we use a panel of 1488 active open-end mutual funds for the period 2004-2013. We use fund-specific time-dynamic betas. Information asymmetry is measured as the standard deviation of idiosyncratic risk. The dataset is decomposed into five market fundamentals in order to emphasis the policy implications of our findings with respect to (i) equity, (ii) fixed income, (iii) allocation, (iv) alternative and (v) tax preferred mutual funds. The empirical evidence is based on endogeneity-robust Difference and System Generalised Method of Moments. The following findings are established. First, information asymmetry broadly follows the same trend as volatility, with a higher sensitivity to market risk exposure. Second, fund managers tend to raise (cutback) their risk exposure in time of high (low) market liquidity. Third, there is evidence of convergence in equity funds. We may therefore infer that equity funds with lower market risk exposure are catching-up with their counterparts with higher exposure to fluctuation in market conditions. The paper complements the scarce literature on market timing in the mutual fund industry with time-dynamic betas, information asymmetry and an endogeneity-robust empirical approach.
Original languageEnglish
Pages (from-to)542-557
Number of pages16
JournalInternational Journal of Managerial Finance
Volume14
Issue number5
DOIs
Publication statusPublished - 8 Oct 2018

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Mutual funds
Industry
Market timing
Asymmetric information
Equity
Risk exposure
Information asymmetry
Endogeneity
Market risk
Standard deviation
Empirical evidence
Fluctuations
Fixed income
Idiosyncratic risk
Expected returns
Asymmetry of information
Policy implications
Catching-up
Generalized method of moments
Tax

Keywords

  • Information asymmetry; Mutual funds; Market timing; Market uncertainty

Cite this

Effects of asymmetric information on market timing in the mutual fund industry. / Nwachukwu, Jacinta; Tchamyou, Vanessa S; Asongu, Simplice.

In: International Journal of Managerial Finance, Vol. 14, No. 5, 08.10.2018, p. 542-557.

Research output: Contribution to journalArticle

Nwachukwu, Jacinta ; Tchamyou, Vanessa S ; Asongu, Simplice. / Effects of asymmetric information on market timing in the mutual fund industry. In: International Journal of Managerial Finance. 2018 ; Vol. 14, No. 5. pp. 542-557.
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