Jensen's Alpha and the Market Timing Puzzle

Bunnenberg S, Rohleder M, Scholz H, Wilkens M (2019)

Publication Language: English

Publication Type: Journal article

Publication year: 2019

Journal

Review of Financial Economics Elsevier BV

Book Volume: 37

Pages Range: 234-255

Journal Issue: 2

DOI: 10.1002/rfe.1033

Abstract

Theory predicts that market timing in managed portfolios biases Jensen’s alpha. However, empirical studies have failed to find evidence this bias actually exists. We tackle this puzzle by showing via a nested model approach and various simulations that, for the bias to become economically relevant, its components, the extent of timing activity and market conditions, must be extreme. Empirically, however, such conditions rarely occur, explaining why the bias does not appear in the data. In a comprehensive empirical analysis of US mutual funds, we find that measures of total performance that allow for timing activities are virtually identical to Jensen’s alpha. Hence, the key takeaway of this paper is that Jensen’s alpha is a sufficient measure of total performance, even in the presence of timing.

Authors with CRIS profile

Hendrik Scholz Lehrstuhl für Betriebswirtschaftslehre, insbesondere Finanzierung und Banken

Involved external institutions

Universität Augsburg DE Germany (DE) Gottfried Wilhelm Leibniz Universität Hannover DE Germany (DE)

How to cite

APA:

Bunnenberg, S., Rohleder, M., Scholz, H., & Wilkens, M. (2019). Jensen's Alpha and the Market Timing Puzzle. Review of Financial Economics, 37(2), 234-255. https://dx.doi.org/10.1002/rfe.1033

MLA:

Bunnenberg, Sebastian, et al. "Jensen's Alpha and the Market Timing Puzzle." Review of Financial Economics 37.2 (2019): 234-255.

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