The Wildcard Option in Transacting Mutual-Fund Shares
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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