Hostname: page-component-586b7cd67f-rdxmf Total loading time: 0 Render date: 2024-11-22T06:06:50.192Z Has data issue: false hasContentIssue false
  • English
  • Français

Stale Prices and the Performance Evaluation of Mutual Funds

Published online by Cambridge University Press:  10 December 2010

Meijun Qian
Meijun Qian*
Affiliation:
National University of Singapore, Business School and Risk Management Institute, 15 Kent Ridge Dr., MRB 07-66, Singapore, 119245. [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Staleness in measured prices imparts a positive statistical bias and a negative dilution effect on mutual fund performance. First, evaluating performance with nonsynchronous data generates a spurious component of alpha. Second, stale prices create arbitrage opportunities for high-frequency traders whose trades dilute the portfolio returns and hence fund performance. This paper introduces a model that evaluates fund performance while controlling directly for these biases. Empirical tests of the model show that alpha net of these biases is on average positive although not significant and about 40 basis points higher than alpha measured without controlling for the impacts of stale pricing. The difference between the net alpha and the measured alpha consists of 3 components: a statistical bias, the dilution effect of long-term fund flows, and the dilution effect of arbitrage flows. Whereas the former 2 components are small, the latter is large and widespread in the fund industry.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 2 , April 2011 , pp. 369 - 394
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A. R.; Bhattacharya, S.; Pfleiderer, P.; and Ross, S. A.. “On Timing and Selectivity.” Journal of Finance, 41 (1986), 715–730.CrossRefGoogle Scholar
Becker, C.; Ferson, W. E.; Myers, D. H.; and Schill, M. J.. “Conditional Market Timing with Benchmark Investors.” Journal of Financial Economics, 52 (1999), 119–148.CrossRefGoogle Scholar
Bhargava, R.; Bose, A.; and Dubofsky, D. A.. “Exploiting International Stock Market Correlation with Open-End International Mutual Funds.” Journal of Business Finance and Accounting, 25 (1998), 765–773.CrossRefGoogle Scholar
Boudoukh, J.; Richardson, M. P.; Subrahmanyam, M.; and Whitelaw, R. F.. “Stale Prices and Strategies for Trading Mutual Funds.” Financial Analysts Journal, 58 (2002), 53–71.CrossRefGoogle Scholar
Brown, S. J., and Warner, J. B.. “Using Daily Stock Returns: The Case of Event Studies.” Journal of Financial Economics, 14 (1985), 3–31.CrossRefGoogle Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chalmers, J. M. R.; Edelen, R. M.; and Kadlec, G. B.. “On the Perils of Financial Intermediaries Setting Security Prices: The Mutual Fund Wild Card Option.” Journal of Finance, 56 (2001), 2209–2236.CrossRefGoogle Scholar
Chen, Y.; Ferson, W. E.; and Peters, H.. “Measuring the Timing Ability and Performance of Bond Mutual Funds.” Journal of Financial Economics, 98 (2010), 72–89.CrossRefGoogle Scholar
Dimson, E. “Risk Measurement When Shares Are Subject to Infrequent Trading.” Journal of Financial Economics, 7 (1979), 197–226.CrossRefGoogle Scholar
Edelen, R. M. “Investor Flows and the Assessed Performance of Open-End Mutual Funds.” Journal of Financial Economics, 53 (1999), 439–466.CrossRefGoogle Scholar
Edelen, R. M., and Warner, J. B.. “Aggregate Price Effects of Institutional Trading: A Study of Mutual Fund Flow and Market Returns.” Journal of Financial Economics, 59 (2001), 195–220.CrossRefGoogle Scholar
Elton, E. J.; Gruber, M. J.; Das, S.; and Hlavka, M.. “Efficiency with Costly Information: A Reinterpretation of Evidence from Managed Portfolios.” Review of Financial Studies, 6 (1993), 1–22.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns. " Journal of Finance, 47 (1992), 427–465.Google Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Ferson, W. E., and Qian, M.. “Conditional Performance Evaluation, Revisited." Charlottesville, VA: Research Foundation of CFA Institute (2004).Google Scholar
Ferson, W. E.; Sarkissian, S.; and Simin, T. T.. “Spurious Regressions in Financial Economics?” Journal of Finance, 58 (2003), 1393–1413.CrossRefGoogle Scholar
Ferson, W. E.; Sarkissian, S.; and Simin, T. T.. “Asset Pricing Models with Conditional Alphas and Betas: The Effects of Data Snooping and Spurious Regression.” Journal of Financial and Quantitative Analysis, 43 (2008), 331–354.CrossRefGoogle Scholar
Ferson, W. E., and Schadt, R. W.. “Measuring Fund Strategy and Performance in Changing Economic Conditions.” Journal of Finance, 51 (1996), 425–461.CrossRefGoogle Scholar
Ferson, W. E., and Warther, V. A.. “Evaluating Fund Performance in a Dynamic Market.” Financial Analysts Journal, 52 (1996), 20–28.CrossRefGoogle Scholar
Getmansky, M.; Lo, A. W.; and Makarov, I.. “An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns.” Journal of Financial Economics, 74 (2004), 529–609.CrossRefGoogle Scholar
Goetzmann, W. N.; Ivković, Z.; and Rouwenhorst, K. G.. “Day Trading International Mutual Funds: Evidence and Policy Solutions.” Journal of Financial and Quantitative Analysis, 36 (2001), 287–309.CrossRefGoogle Scholar
Greene, J. T., and Hodges, C. W.. “The Dilution Impact of Daily Fund Flows on Open-End Mutual Funds.” Journal of Financial Economics, 65 (2002), 131–158.CrossRefGoogle Scholar
Hansen, L. P. “Large Sample Properties of Generalized Method of Moments Estimators.” Econometrica, 50 (1982), 1029–1054.CrossRefGoogle Scholar
Hansen, L. P., and Singleton, K. J.. “Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models.” Econometrica, 50 (1982), 1269–1286.CrossRefGoogle Scholar
Ippolito, R. A. “Efficiency with Costly Information: A Study of Mutual Fund Performance, 1965–1984.” Quarterly Journal of Economics, 104 (1989), 1–23.CrossRefGoogle Scholar
Jensen, M. C. “The Performance of Mutual Funds in the Period 1945–1964.” Journal of Finance, 23 (1968), 389–416.Google Scholar
Lehmann, B. N., and Modest, D. M.. “Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons.” Journal of Finance, 42 (1987), 233–265.CrossRefGoogle Scholar
Lo, A. W., and MacKinlay, A. C.. “An Econometrics Analysis of Nonsynchronous-Trading.” Journal of Econometrics, 45 (1990), 181–212.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Pastor, L., and Stambaugh, R. F.. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy, 111 (2003), 642–685.CrossRefGoogle Scholar
Qian, M. “Is ‘Voting with Your Feet’ an Effective Mutual Fund Governance Mechanism?” Journal of Corporate Finance, 17 (2011), 45–61.CrossRefGoogle Scholar
Rubinstein, M. E. “A Comparative Statics Analysis of Risk Premiums.” Journal of Business, 46 (1973), 605–615.CrossRefGoogle Scholar
Scholes, M., and Williams, J.. “Estimating Betas from Nonsynchronous Data.” Journal of Financial Economics, 5 (1977), 307–327.CrossRefGoogle Scholar
Sharpe, W. F. “Mutual Fund Performance.” Journal of Business, 39 (1966), 119–138.CrossRefGoogle Scholar
Sharpe, W. F. “Determining a Fund’s Effective Asset Mix.” Investment Management Review (1988), 59–69.Google Scholar
Sharpe, W. F. “Asset Allocation: Management Style and Performance Measurement.” Journal of Portfolio Management, 18 (1992), 7–19.CrossRefGoogle Scholar
Stein, C. “Estimating the Mean of a Multivariate Normal Distribution.” Proceedings of the Prague Symposium on Asymptotic Statistics, Prague (1973).Google Scholar
Zitzewitz, E. “Who Cares about Shareholders? Arbitrage-Proofing Mutual Funds.” Journal of Law, Economics, and Organization, 19 (2003), 245–280.CrossRefGoogle Scholar