Do Mutual Fund Managers Adjust NAV for Stale Prices?

38 Pages Posted: 16 Sep 2011 Last revised: 17 Aug 2013

See all articles by Vincent Gregoire

Vincent Gregoire

HEC Montreal - Department of Finance

Date Written: August 16, 2013


Mutual fund returns are predictable when the Net Asset Value is computed from prices that do not reflect all available information. This problem was brought to the public eye with the late trading and market timing scandal of 2003, which led to SEC intervention in 2004. Since these events, mutual fund managers have been more active in adjusting NAV, reducing predictability by about half. The simple trading strategy I present yields annual returns of 33% from 2001 to 2004 and 16% from 2005 to 2010. Even after accounting for trading restrictions in mutual funds, an arbitrager could earn annual returns of 2.73% from 2005 to 2010, suggesting the problem is not fully resolved. The main methodological contribution of this paper is to develop a filtering approach based on a state-space model that embeds the fund manager problem, thus accounting for unobserved actions of fund managers. I also show that predictability increases significantly when information sources suggested by prior literature, such as index and futures returns, are supplemented by premiums on related exchange traded funds).

Keywords: Exchange traded funds, mutual funds, fair value pricing, market timing

JEL Classification: G12, G14, G15

Suggested Citation

Gregoire, Vincent, Do Mutual Fund Managers Adjust NAV for Stale Prices? (August 16, 2013). Available at SSRN: or

Vincent Gregoire (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7

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