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Day Trading International Mutual Funds: Evidence and Policy Solutions

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Author Info
Goetzmann, William N.
Ivkovi?, Zoran
Rouwenhorst, K. Geert

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Abstract

Daily pricing of mutual funds provides liquidity to investors but is subject to valuation errors due to the inability to observe synchronous, fair security prices at the end of the trading day. This mayhurt fund investor if speculatior strategiclly seek to exploit mispricing or if the net flow of money into funds is correlated with these pricing eerrors. We show that mutual funds are exposed to speculative traders by using a simple day trading rule that yields large profits in a sample of 391 U.S.-based open-end international mutual funds. We propose a simple mechanism that alleviated these concerns by correcting net asset values for stale prices. We argue that fund companies and regulatiors should look at alternatives that allow funds to offer fair prciing to investors, which, in turn, decreases the need to resort to monitoring for day traders and redemption penalties.

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Publisher Info
Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 36 (2001)
Issue (Month): 03 (September)
Pages: 287-309
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cup:jfinqa:v:36:y:2001:i:03:p:287-309_00

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  1. Eric Zitzewitz, 2005. "How Widespread is Late Trading in Mutual Funds?," Finance 0501002, EconWPA. [Downloadable!]
    Other versions:
  2. Zitzewitz, Eric, 2002. "Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds," Research Papers 1749, Stanford University, Graduate School of Business. [Downloadable!]
    Other versions:
  3. Patrick E. McCabe, 2009. "The economics of the mutual fund trading scandal," Finance and Economics Discussion Series 2009-06, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. James J. Choi & David Laibson & Andrew Metrick, 2000. "Does the Internet Increase Trading? Evidence from Investor Behavior in 401(k) Plans," NBER Working Papers 7878, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2005. "Unobserved Actions of Mutual Funds," NBER Working Papers 11766, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Dirk Nitzsche & Keith Cuthbertson & Niall O'Sullivan, 2005. "Mutual Fund Performance: Skill Or Luck?," Money Macro and Finance (MMF) Research Group Conference 2005 4, Money Macro and Finance Research Group. [Downloadable!]
  7. Susan E. K. Christoffersen & Christopher C. Geczy & David K. Musto & Adam V. Reed, 2004. "Do Shareholders' Preferences Affect their Funds' Management? Evidence from the Cross Section of Shareholders and Funds," CIRANO Working Papers 2004s-22, CIRANO. [Downloadable!]
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