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Day Trading International Mutual Funds: Evidence And Policy Solutions

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Author Info
K. Geert Rouwenhorst () (School of Management)
William N. Goetzmann () (Yale University, School of Management)
Zoran Ivkovich () (Department of Finance)

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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 may hurt fund investors if speculators strategically seek to exploit mispricing or if the net flow of money into funds is correlated with these pricing errors. 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 "fair pricing" mechanism that alleviates these concerns by correcting net asset values for stale prices. We argue that fund companies and regulators should look at alternatives that allow funds to offer fair pricing to investors, which in turn decreases the need to resort to monitoring for day traders and redemption penalties

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Publisher Info
Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm138.

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Date of creation: 05 Apr 2000
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Handle: RePEc:ysm:somwrk:ysm138

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Find related papers by JEL classification:
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  1. 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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  2. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2005. "Unobserved Actions of Mutual Funds," NBER Working Papers 11766, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Eric Zitzewitz, 2006. "How Widespread Was Late Trading in Mutual Funds?," American Economic Review, American Economic Association, vol. 96(2), pages 284-289, May. [Downloadable!]
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  4. 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!]
  5. 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!]
  6. Zitzewitz, Eric, 2002. "Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds," Research Papers 1749, Stanford University, Graduate School of Business. [Downloadable!]
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