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Day Trading International Mutual Funds: Evidence and Policy Solutions

Published online by Cambridge University Press:  06 April 2009

William N. Goetzmann ,
Zoran Ivković  and
K. Geert Rouwenhorst
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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 mayhurt fund investor if speculatior strategiclly seek to exploit mispricing or if the net flow of money into funds is correlated with these pricing eerrors. 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 alleviated these concerns by correcting net asset values for stale prices. We argue that fund companies and regulatiors should look at alternatives that allow funds to offer fair prciing to investors, which, in turn, decreases the need to resort to monitoring for day traders and redemption penalties.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 36 , Issue 3 , September 2001 , pp. 287 - 309
Copyright
Copyright © School of Business Administration, University of Washington 2001

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