Predictable Changes in NAV: The Wildcard Option in Transacting Mutual Fund Shares
44 Pages Posted: 22 Nov 1999
Date Written: July 2000
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: Suggested Citation