Dynamic Market Timing in Mutual Funds

We use the dynamic conditional correlation (DCC) model to estimate daily frequency mutual fund betas. Compared with traditional estimates, daily betas better capture changes in fund risk stemming from daily fund trading activity. Based on these beta estimates and a two -stage estimation procedure, we find significant evidence of market timing ability among actively managed U.S. equity funds that is not apparent via standard approaches. Unlike traditional measures, our timing estimates correlate positively with fund performance. Market timing is especially evident during down markets, with successful timers exhibiting low downside risk. Timing ability persists across time and attracts investor flows.