Jensen's Alpha and the Market Timing Puzzle

Journal article


Publication Details

Author(s): Bunnenberg S, Rohleder M, Scholz H, Wilkens M
Journal: Review of Financial Economics
Publication year: 2019
Volume: 37
Journal issue: 2
Pages range: 234-255
ISSN: 1058-3300
Language: English


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.


FAU Authors / FAU Editors

Scholz, Hendrik Prof. Dr.
Lehrstuhl für Betriebswirtschaftslehre, insbesondere Finanzierung und Banken


External institutions with authors

Gottfried Wilhelm Leibniz Universität Hannover
Universität Augsburg


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.

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

BibTeX: 

Last updated on 2019-10-04 at 14:38