Option Replication and the Performance of a Market Timer

Hübner, Georges

doi:10.1108/SEF-01-2015-0012

Download

Article (Scientific journals)

Option Replication and the Performance of a Market Timer

Hübner, Georges

2016 • In Studies in Economics and Finance, 33 (1), p. 2-25

Peer Reviewed verified by ORBi

Permalink
https://hdl.handle.net/2268/181974

DOI
10.1108/SEF-01-2015-0012

Files (1)Send to Details Statistics Bibliography Similar publications

Files

Full Text

mkttim-v21 sef.pdf

Author postprint (283.17 kB)

Download

All documents in ORBi are protected by a user license.

Send to

RIS BibTex APA Chicago Permalink X Linkedin

Details

Keywords :

Performance measurement; market timing; Treynor and Mazuy; option replication; mutual fund performance

Abstract :

[en] The Treynor and Mazuy framework is a widely used return-based model of market timing. However, existing corrections to the regression intercept can be manipulated through derivatives trading. We propose an adjustment based on Merton's option replication approach. The linear and quadratic coefficients of the regression are exploited to assess the cost of the replicating option that yields similar convexity for a passive portfolio. A similar reasoning applies for various timing patterns and in multi-factor models. The proposed framework induces a potential rebalancing risk and involves the delicate issue of choosing the cheapest option. We show that these issues can be overcome for reasonable tolerance levels.

Disciplines :

Finance

Author, co-author :

Hübner, Georges ; Université de Liège > HEC-Ecole de gestion : UER > Gestion financière

Language :

English

Title :

Option Replication and the Performance of a Market Timer

Publication date :

March 2016

Journal title :

Studies in Economics and Finance

ISSN :

1086-7376

eISSN :

1755-6791

Publisher :

Emerald

Volume :

Issue :

Pages :

2-25

Peer reviewed :

Peer Reviewed verified by ORBi

Available on ORBi :

since 27 May 2015

Statistics

Number of views

146 (14 by ULiège)

Number of downloads

378 (11 by ULiège)

More statistics

Scopus citations^®

Scopus citations^®
without self-citations

OpenCitations

Bibliography

Admati, A., Bhattacharya, S., Pfleiderer, P. and Ross, S. (1986), “On timing and selectivity”, The Journal of Finance, Vol. 41 No. 3, pp. 715-732.
Agarwal, V. and Naik, N.Y. (2004), “Risks and portfolio decisions involving hedge funds”, Review of Financial Studies, Vol. 17 No. 1, pp. 63-98.
Becker, C., Ferson, W.E., Myers, D.H. and Schill, M.J. (1999), “Conditional market timing with benchmark investors”, Journal of Financial Economics, Vol. 52 No. 1, pp. 119-148.
Blake, C., Elton, E. and Gruber, M. (1993), “The performance of bond mutual funds”, The Journal of Business, Vol. 66 No. 3, pp. 71-403.
Bollen, N.P.B. and Busse, J.A. (2004), “Short-term persistence in mutual fund performance”, Review of Financial Studies, Vol. 18 No. 2, pp. 569-597.
Carhart, M. (1997), “On persistence in mutual fund performance”, The Journal of Finance, Vol. 52 No. 5, pp. 57-82.
Chen, L.-W., Adams, A. and Taffler, R. (2013), “What style-timing skills do mutual fund ‘stars’ possess?”, Journal of Empirical Finance, Vol. 21, pp. 156-173.
Chen, Y. and Liang, B. (2007), “Do market timing hedge funds time the market”, Journal of Financial and Quantitative Analysis, Vol. 42 No. 4, pp. 827-856.
Comer, G. (2006), “Hybrid mutual funds and market timing performance”, The. Journal of Business, Vol. 79 No. 2, pp. 771-797.
Comer, G., Larrymore, N. and Rodriguez, J. (2009), “Controlling for fixed income exposure in portfolio evaluation: evidence from hybrid mutual funds”, Review of Financial Studies, Vol. 22 No. 2, pp. 481-507.
Detemple, J.B., Garcia, R. and Rindisbacher, M. (2010), “Optimal portfolio allocations with hedge funds”, Working Paper, EDHEC Business School.
Elton, E., Gruber, M. and Blake, C. (2011), “An examination of mutual fund timing ability using monthly holdings data”, Review of Finance, Vol. 16 No. 3, pp. 619-645.
Fama, E. and French, K. (1993), “Common risk factors in the returns on stocks and bonds”, Journal of Financial Economics, Vol. 33 No. 1, pp. 3-56.
Fung, W. and Hsieh, D.A. (2001), “The risk in hedge fund strategies: theory and evidence from trend followers”, Review of Financial Studies, Vol. 14 No. 2, pp. 313-341.
Garman, M. (1992), “Charm school”, Risk Magazine, Vol. 5 No. 7, pp. 53-56.
Gilster, J.E.Jr. (1990), “The systematic risk of discretely rebalanced option hedges”, Journal of Financial and Quantitative Analysis, Vol. 25 No. 4, pp. 507-516.
Gilster, J.E.Jr. (1997), “Option pricing theory: is ’risk-free’ hedging feasible?”, Financial Management, Vol. 26 No. 1, pp. 91-105.
Grinblatt, M. and Titman, S. (1994), “A study of monthly mutual fund returns and performance evaluation techniques”, Journal of Financial and Quantitative Analysis, Vol. 29 No. 3, pp. 419-444.
Haug, E.G. (2003), “Know your weapon, part 1”, Wilmott Magazine, May, pp. 49-57.
Henriksson, R.D. and Merton, R.C. (1981), “On market timing and investment performance, II: statistical procedures for evaluating forecasting skills”, The Journal of Business, Vol. 54 No. 4, pp. 513-533.
Huang, J., Sialm, C. and Zhang, H. (2011), “Risk shifting and mutual fund performance”, Review of Financial Studies, Vol. 24 No. 8, pp. 2575-2616.
Ingersoll, J., Spiegel, M., Goetzmann, W. and Welch, I. (2007), “Portfolio performance manipulation and manipulation-proof performance measures”, Review of Financial Studies, Vol. 20 No. 5, pp. 1503-1546.
Jagannathan, R. and Korajczyk, R. (1986), “Assessing the market timing performance of managed portfolios”, The Journal of Business, Vol. 59 No. 2, pp. 217-235.
Jensen, M.J. (1968), “The performance of mutual funds in the period 1945-1964”, The Journal of Finance, Vol. 23 No. 2, pp. 389-416.
Jiang, G.J., Yao, T. and Yu, T. (2007), “Do mutual funds time the market? Evidence from portfolio holdings”, Journal of Financial Economics, Vol. 86 No. 3, pp. 724-758.
Kaplan, S.N. and Sensoy, B.A. (2005), “Do mutual funds time their benchmarks?”, Working Paper, University of Chicago – Booth School of Business.
Krimm, S., Scholz, H. and Wilkens, M. (2011), “Selection, timing and total performance of equity funds: wasting time measuring timing”, Working paper, Catholic University of Eichstätt-Ingolstadt.
Kryzanowski, L., Lalancette, S. and To, M.C. (1997), “Performance attribution using an APT with prespecified macrofactors and time-varying risk premia and betas”, Journal of Financial and Quantitative Analysis, Vol. 32 No. 2, pp. 205-224.
Lee, C.-F. and Rahman, S. (1990), “Market timing, selectivity, and mutual fund performance: an empirical investigation”, The Journal of Business, Vol. 63 No. 2, pp. 261-278.
Lehmann, B. and Modest, D. (1987), “Mutual fund performance evaluation: a comparison of benchmarks and benchmark comparisons”, The Journal of Finance, Vol. 42 No. 2, pp. 233-265.
Mattalin, J.C., Moreno, D. and Rodriguez, R. (2011), “Why is timing perverse?”, Working Paper, University Carlos III.
Merton, R.C. (1981), “On market timing and investment performance, I: an equilibrium theory of value for market forecasts”, The Journal of Business, Vol. 54 No. 3, pp. 363-406.
Rodriguez, J. (2014), “The forecasting ability of world mutual funds”, Studies in Economics and Finance, Vol. 31 No. 2, pp. 130-140.
Sharpe, W.F. (1966), “Mutual fund performance”, The Journal of Business, Vol. 39 No. 1, pp. 119-138.
Treynor, J.L. (1965), “How to rate management investment funds”, Harvard Business Review, Vol. 43 No. 1, pp. 63-75.
Treynor, J.L. and Mazuy, K. (1966), “Can mutual funds outguess the market?”, Harvard Business Review, Vol. 44 No. 4, pp. 131-136.