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How Widespread Was Late Trading in Mutual Funds?

  • Eric Zitzewitz

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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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282806777211892
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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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  1. Greene, Jason T. & Hodges, Charles W., 2002. "The dilution impact of daily fund flows on open-end mutual funds," Journal of Financial Economics, Elsevier, vol. 65(1), pages 131-158, July.
  2. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
  3. Goetzmann, William N. & Ivković, Zoran & Rouwenhorst, K. Geert, 2001. "Day Trading International Mutual Funds: Evidence and Policy Solutions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(03), pages 287-309, September.
  4. Paul G. Mahoney, 2004. "Manager-Investor Conflicts in Mutual Funds," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 161-182, Spring.
  5. Eric Zitzewitz, 2003. "Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(2), pages 245-280, October.
  6. 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, vol. 25(5&6), pages 765-773.
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