How Widespread is Late Trading in Mutual Funds?
This paper uses daily fund flow data to examine the extent of late trading in the U.S. mutual fund industry. Trading decisions that are required by law to have been made before 4 PM Eastern Time are correlated with market movements from 4 to 9 PM that evening. The cross- sectional variation in this correlation is consistent with late trading being its primary cause and inconsistent with alternative explanations. For example, apparent late trading ceases in September 2003 after the announcement of the investigation into mutual fund trading practices, it is three times greater in fund families that have been cited by regulators for allowing late trading, and it is greater in funds and asset classes that are also receiving heavy stale price arbitrage flows. In my sample, which includes 75 percent of non-specialized equity mutual funds and 48 percent of assets, late trading led to average annual shareholder dilution from 1998 to 2003 of 3.8 and 0.9 basis points in international and U.S. equity funds, respectively. If these dilution rates prevailed industry wide, they would imply shareholder losses of about $400 million per year. Furthermore, there is statistically significant evidence of late trading in the funds of 39 of 66 fund families.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Chevalier, J. & Ellison, G., 1996.
"Risk Taking by Mutual Funds as a Response to Incentives,"
96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc.
- William Goetzmann & Zoran Ivkovich & K. Rouwenhorst, 2000.
"Day Trading International Mutual Funds: Evidence And Policy Solutions,"
Yale School of Management Working Papers
ysm138, Yale School of Management, revised 01 Jun 2001.
- 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.
- 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.
- Zitzewitz, Eric, 2002. "Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds," Research Papers 1749, Stanford University, Graduate School of Business.
- Paul G. Mahoney, 2004. "Manager-Investor Conflicts in Mutual Funds," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 161-182, Spring.
- 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.
This item is featured on the following reading lists or Wikipedia pages:
- How Widespread Was Late Trading in Mutual Funds? (AER 2006) in ReplicationWiki
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0501002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.