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Optimal Timing in Trading Japanese Equity Mutual Funds: Theory and Evidence *1

October 2003
Hiroatsu Tanaka *2
Naohiko Baba *3

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  • *1 We thank staff members of the Bank of Japan, particularly Toyoichiro Shirota for helpful comments and suggestions. We benefited from discussions with Professor Hitoshi Takehara and other participants at the workshop on the Japanese stock market held on May 17, 2002 by the Bank of Japan. We are also grateful to Professor Makoto Saito and two anonymous referees for their useful comments. The mutual fund data was provided by the Japan Investment Trust Research Institute.
  • *2 Faculty of Economics, University of Tokyo, E-mail:
  • *3 Financial Markets Department, Bank of Japan, E-mail:


This paper provides both theoretical and empirical analyses of market participants' optimal decision-making in trading Japanese equity mutual funds. First, we build an intertemporal decision-making model under uncertainty in the presence of transaction costs. This setting enables us to shed light on the investors' option to delay investment. A comparative analysis shows that an increase in uncertainty over the expected rate of return on mutual funds has a negative impact not only on market participants' buying behavior but on their selling behavior. Also, a several percent increase in front-end loads and redemption fees is likely to change the optimal holding ratio of mutual funds in investors' portfolios, by up to 10 percent. Second, we empirically examine the theoretical implications using daily transaction data of selected equity mutual funds in Japan. By estimating a panel data model, we conclude that for the sample period, from August 2000 to July 2001, investment behavior has been rational in light of our theoretical model. Our results suggest that investors are likely to rationally postpone their purchases of equity mutual funds under the present circumstances of low expected returns, high degree of uncertainty, and high trading costs.

Key words:
mutual funds, asset allocation, fees, uncertainty, panel data