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The Wildcard Option in Transacting Mutual-Fund Shares

  • John M.R. Chalmers
  • Roger M. Edelen
  • Gregory B. Kadlec
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    This study documents high-frequency (daily) mutual fund return autocorrelations and examines the causes and consequences. We assert the cause to be nonsynchronous trading in the underlying assets of the fund, which presents investors with an option to (indirectly) trade those assets at stale prices. We refer to this option as the mutual-fund wildcard option. We show that investors who exploit this option can make abnormal returns of about 1.20% with only four (roundtrip) trades in fund shares. Approximately 45% of the equity fund universe allow this frequency of transacting without load or transaction fees. Using data on the daily flow into and out of individual mutual funds, we find some evidence that investors exploit this wildcard option.

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    File URL: http://fic.wharton.upenn.edu/fic/papers/00/0003.pdf
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    Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 00-03.

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    Date of creation: Nov 1999
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    Handle: RePEc:wop:pennin:00-03
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    1. William N. Goetzmann & Stephen J. Brown, 2005. "Performance Persistence," Yale School of Management Working Papers ysm451, Yale School of Management.
    2. Cohen, Kalman J. & Hawawini, Gabriel A. & Maier, Steven F. & Schwartz, Robert A. & Whitcomb, David K., 1983. "Friction in the trading process and the estimation of systematic risk," Journal of Financial Economics, Elsevier, vol. 12(2), pages 263-278, August.
    3. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1992. "Trading Volume and Serial Correlation in Stock Returns," NBER Working Papers 4193, National Bureau of Economic Research, Inc.
    4. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    5. Bessembinder, Hendrik & Hertzel, Michael G, 1993. "Return Autocorrelations around Nontrading Days," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 155-89.
    6. Stephen R. Foerster & Donald B. Keim, . "Direct Evidence of Non-Trading of NYSE and AMEX Stocks," Rodney L. White Center for Financial Research Working Papers 19-93, Wharton School Rodney L. White Center for Financial Research.
    7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    8. Conrad, Jennifer & Gultekin, Mustafa N & Kaul, Gautam, 1991. "Asymmetric Predictability of Conditional Variances," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 597-622.
    9. Goetzmann, W.N. & Ibbotson, R.G., 1990. "Do Winners Repeat? Patterns in Mutual Fund Behavior," Papers fb-_91-04, Columbia - Graduate School of Business.
    10. Atchison, Michael D & Butler, Kirt C & Simonds, Richard R, 1987. " Nonsynchronous Security Trading and Market Index Autocorrelation," Journal of Finance, American Finance Association, vol. 42(1), pages 111-18, March.
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