Artificial Market Timing in Mutual Funds

We document statistically significant relations between fund beta and past market returns that affect standard estimates of mutual fund market timing. Our evidence of “artificial” market timing emerges when we estimate market timing regressions across time periods that span time variation in fund systematic risk levels, as is typical. Artificial timing significantly explains the inverse relation between market timing and stock selectivity, while contributing to evidence of perverse market timing among certain funds. Analyzing transaction-level data shows that artificial timing leads to higher transaction costs and lower fund performance.