Performance measurement; market timing; Treynor and Mazuy; option replication; mutual fund performance
Abstract :
[en] The Treynor and Mazuy framework is a widely used return-based model of market timing. However, existing corrections to the regression intercept can be manipulated through derivatives trading. We propose an adjustment based on Merton's option replication approach. The linear and quadratic coefficients of the regression are exploited to assess the cost of the replicating option that yields similar convexity for a passive portfolio. A similar reasoning applies for various timing patterns and in multi-factor models. The proposed framework induces a potential rebalancing risk and involves the delicate issue of choosing the cheapest option. We show that these issues can be overcome for reasonable tolerance levels.
Disciplines :
Finance
Author, co-author :
Hübner, Georges ; Université de Liège > HEC-Ecole de gestion : UER > Gestion financière
Language :
English
Title :
Option Replication and the Performance of a Market Timer
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