Predictable Changes in NAV: The Wildcard Option in Transacting Mutual Fund Shares

44 Pages Posted: 22 Nov 1999

See all articles by John Chalmers

John Chalmers

University of Oregon

Roger M. Edelen

Virginia Tech

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business

Date Written: July 2000

Abstract

Mutual funds price their shares using last-trade prices of their underlying assets. Because last-trade prices are often stale, this practice results in fund share prices (NAVs) whose daily changes are predictable. We show that the predictability is pervasive and economically significant in domestic equity and foreign equity funds, which comprise more than $4 trillion in assets. Easily implemented trading strategies yield Sharpe ratios that are almost an order of magnitude higher than comparable buy-and-hold strategies. We demonstrate that a simple methodology designed to update assets' last trade prices eliminates most of this predictability.

JEL Classification: G10, G23

Suggested Citation

Chalmers, John and Edelen, Roger M. and Kadlec, Gregory B., Predictable Changes in NAV: The Wildcard Option in Transacting Mutual Fund Shares (July 2000). Available at SSRN: https://ssrn.com/abstract=191428 or http://dx.doi.org/10.2139/ssrn.191428

John Chalmers

University of Oregon ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-3337 (Phone)

Roger M. Edelen (Contact Author)

Virginia Tech ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States
540-231-4316 (Phone)

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