Detecting mutual fund timing ability using the threshold model

Abstract

This paper proposes a new method based on threshold regression to test mutual fund market-timing abilities. The traditional Henriksson and Merton model is shown to represent only a special case within the proposed model. The potential bias of using the traditional model is demonstrated and it is argued that the proposed model provides more accurate inferences on the market-timing effects or mutual funds. The empirical results for a set of randomly-selected US mutual funds indicate the superior performance of the proposed method in detecting the market-timing ability.