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How Widespread Was Late Trading in Mutual Funds?

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  • Eric Zitzewitz

Abstract

This paper uses daily fund flow data to examine the extent of late trading in the mutual fund industry. Using data from a 10-15 percent subsample of the industry, I find annual long-term shareholder losses due to late trading of about 5 basis points in international equity funds and 0.6 basis points in domestic equity funds in 2001, and similar dilution rates in a separate dataset for February to July 2003. If these dilution rates prevail industry-wide, it would imply shareholder losses of about $400 million per year. Although shareholder losses due to late trading are smaller than those due to market timing, international fund inflows are almost as sensitive to 4 PM to 7 PM market movements as they are to pre-4 PM movements, suggesting that the practice is almost as widespread as the timing of international funds. Furthermore, there is statistically significant evidence of late trading in the international funds of 15 out of 50 fund families in the sample.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 96 (2006)
Issue (Month): 2 (May)
Pages: 284-289

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Handle: RePEc:aea:aecrev:v:96:y:2006:i:2:p:284-289

Note: DOI: 10.1257/000282806777211892
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References

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  1. Eric Zitzewitz, 2003. "Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 19(2), pages 245-280, October.
  2. Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc.
  3. William Goetzmann & Zoran Ivkovich & K. Rouwenhorst, 2000. "Day Trading International Mutual Funds: Evidence And Policy Solutions," Yale School of Management Working Papers, Yale School of Management ysm138, Yale School of Management, revised 01 Jun 2001.
  4. Greene, Jason T. & Hodges, Charles W., 2002. "The dilution impact of daily fund flows on open-end mutual funds," Journal of Financial Economics, Elsevier, Elsevier, vol. 65(1), pages 131-158, July.
  5. Rahul Bhargava & Ann Bose & David A. Dubofsky, 1998. "Exploiting International Stock Market Correlations with Open-end International Mutual Funds," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 25(5&6), pages 765-773.
  6. Paul G. Mahoney, 2004. "Manager-Investor Conflicts in Mutual Funds," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 161-182, Spring.
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Cited by:
  1. Jay R. Ritter, 2008. "Forensic Finance," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 127-47, Summer.
  2. Cici, Gjergji & Gibson, Scott & Moussawi, Rabih, 2010. "Mutual fund performance when parent firms simultaneously manage hedge funds," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 19(2), pages 169-187, April.
  3. Wil liam C. Gerken & Stephen G. Dimmock, 2011. "Predicting Fraud by Investment Managers," NFI Working Papers 2011-WP-09, Indiana State University, Scott College of Business, Networks Financial Institute.
  4. Xavier Giné & Robert Townsend & James Vickery, 2007. "Statistical Analysis of Rainfall Insurance Payouts in Southern India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 89(5), pages 1248-1254.
  5. Ferris, Stephen P. & Yan, Xuemin (Sterling), 2007. "Do independent directors and chairmen matter? The role of boards of directors in mutual fund governance," Journal of Corporate Finance, Elsevier, Elsevier, vol. 13(2-3), pages 392-420, June.
  6. Qian, Meijun, 2011. "Is "voting with your feet" an effective mutual fund governance mechanism?," Journal of Corporate Finance, Elsevier, Elsevier, vol. 17(1), pages 45-61, February.
  7. Ludovic Phalippou, 2009. "Beware of Venturing into Private Equity," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 147-66, Winter.
  8. Patrick E. McCabe, 2009. "The economics of the mutual fund trading scandal," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2009-06, Board of Governors of the Federal Reserve System (U.S.).
  9. Basak, Suleyman & Pavlova, Anna, 2012. "Asset Prices and Institutional Investors," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9120, C.E.P.R. Discussion Papers.
  10. Eric Fricke, 2013. "Board compensation, holdings and mutual fund expense ratios," Managerial Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 39(3), pages 228-250, February.
  11. Massa, Massimo & Reuter, Jonathan & Zitzewitz, Eric, 2010. "When should firms share credit with employees? Evidence from anonymously managed mutual funds," Journal of Financial Economics, Elsevier, Elsevier, vol. 95(3), pages 400-424, March.

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