Working Paper: NBER ID: w17615
Authors: Marcin Kacperczyk; Stijn Van Nieuwerburgh; Laura Veldkamp
Abstract: Mutual fund managers can outperform the market by picking stocks or timing the market successfully. Previous work has estimated picking and timing skill, assuming that each manager is endowed with a fixed amount of each and found some evidence of picking skills and little evidence of timing skills among successful managers. This paper estimates skill separately in booms and recessions and finds that the extent to which managers focus on stock picking or market timing fluctuates with the state of the economy. Stock picking is more prevalent in booms, while market timing dominates in recessions. We use this finding to develop a new methodology for detecting managerial skill. The results suggest that some but not all managers have skill. We describe the characteristics of the skilled managers and show that skilled managers significantly outperform the market.
Keywords: mutual funds; fund manager skill; market timing; stock picking
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 |
|---|---|
| economic conditions (E66) | stock picking ability (G11) |
| economic conditions (E66) | market timing ability (G14) |
| fund manager skills (G11) | forecasting firm-specific fundamentals (G17) |
| fund manager skills (G11) | predicting market fluctuations (G17) |
| skilled managers (M54) | outperforming passive benchmarks (G11) |