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On Timing and Selectivity

Authors

  • ANAT R. ADMATI,

  • SUDIPTO BHATTACHARYA,

  • PAUL PFLEIDERER,

  • STEPHEN A. ROSS

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    • Stanford University, University of California at Berkeley, Stanford University and Yale University, respectively. We would like to acknowledge the useful comments of Mike Gibbons, Mark Grinblatt, David Modest, and Robert Verrecchia. The third author received support from the Stanford Program in Finance.


ABSTRACT

The dichotomy between timing ability and the ability to select individual assets has been widely used in discussing investment performance measurement. This paper discusses the conceptual and econometric problems associated with defining and measuring timing and selectivity. In defining these notions we attempt to capture their intuitive interpretation. We offer two basic modeling approaches, which we term the portfolio approach and the factor approach. We show how the quality of timing and selectivity information can be identified statistically in a number of simple models, and discuss some of the econometric issues associated with these models. In particular, a simple quadratic regression is shown to be valid in measuring timing information.

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