Selectivity and timing performance of UK investment trusts

Kenbata Bangassa, Chen Su, Nathan L. Joseph

Research output: Contribution to journalArticle

Abstract

This study examines the selectivity and timing performance of 218 UK investment trusts over the period July 1981 to June 2009. We estimate the Treynor and Mazuy (1966) and Henriksson and Merton (1981) models augmented with the size, value, and momentum factors, either under the OLS method adjusted with the Newey-West procedure or under the GARCH(1,1)-in-mean method following the specification of Glosten et al. (1993; hereafter GJR-GARCH-M). We find that the OLS method provides little evidence in favour of the selectivity and timing ability, consistent with previous studies. Interestingly, the GJR-GARCH-M method reverses this result, showing some relatively strong evidence on favourable selectivity ability, particularly for international funds, as well as favourable timing ability, particularly for domestic funds. We conclude that the GJR-GARCH-M method performs better in evaluating fund performance compared with the OLS method and the non-parametric approach, as it essentially accounts for the time-varying characteristics of factor loadings and hence obtains more reliable results, in particular, when the high frequency data, such as the daily returns, are used in the analysis. Our results are robust to various in-sample and out-of-sample tests and have valuable implications for practitioners in making their asset allocation decisions across different fund styles.
Original languageEnglish
Pages (from-to)1149-1175
Number of pages27
JournalJournal of International Financial Markets, Institutions and Money
Volume22
Issue number5
DOIs
Publication statusPublished - Dec 2012

Fingerprint

Investment trusts
Selectivity
GJR-GARCH Model
GARCH-M model
Merton model
Fund performance
Time-varying
Asset allocation
High-frequency data
Generalized autoregressive conditional heteroscedasticity
Factor loadings
Momentum
Factors

Keywords

  • investment trusts
  • selectivity and timing
  • GJR-GARCH-M
  • conditional asymmetry
  • high frequency data

Cite this

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Selectivity and timing performance of UK investment trusts. / Bangassa, Kenbata ; Su, Chen; Joseph, Nathan L.

In: Journal of International Financial Markets, Institutions and Money, Vol. 22, No. 5, 12.2012, p. 1149-1175.

Research output: Contribution to journalArticle

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