Working Paper: CEPR ID: DP9025
Authors: Marcin Kacperczyk; Stijn Van Nieuwerburgh; Laura Veldkamp
Abstract: How to evaluate a fund manager?s skill is a central question in empirical finance. Prior literature has defined skill as an ability to either pick stocks or time the market, at all times. We propose a new definition of skill as a general cognitive ability used in different ways at different times. We find evidence for stock picking in booms and for market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new metric of managerial ability that can be constructed in real time and can predict fund performance. The metric gives more weight to a fund?s market timing in recessions and to a fund?s stock picking in booms, and it displays far more persistence than either market timing or stock picking alone.
Keywords: Business Cycle; Mutual Funds; Skills
JEL Codes: G00; G11; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market conditions (expansions vs. recessions) (E32) | fund managers' abilities to pick stocks (G11) |
| market conditions (expansions vs. recessions) (E32) | fund managers' abilities to time the market (G14) |
| economic expansions (E32) | better stock picking ability (G11) |
| economic recessions (F44) | better market timing ability (G14) |
| better stock picking ability in expansions (G11) | better market timing ability in recessions (G17) |
| fund managers' abilities to pick stocks (G11) | fund managers' abilities to time the market (G14) |