Day Trading International Mutual Funds: Evidence And Policy Solutions

38 Pages Posted: 5 Apr 2000  

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Zoran Ivkovich

Michigan State University, Department of Finance

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 2000

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 may hurt fund investors if speculators strategically seek to exploit mispricing or if the net flow of money into funds is correlated with these pricing errors. 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 alleviates these concerns by correcting net asset values for stale prices. We argue that fund companies and regulators should look at alternatives that allow funds to offer fair pricing to investors, which in turn decreases the need to resort to monitoring for day traders and redemption penalties.

JEL Classification: G12, G18

Suggested Citation

Goetzmann, William N. and Ivkovich, Zoran and Rouwenhorst, K. Geert, Day Trading International Mutual Funds: Evidence And Policy Solutions (October 2000). AFA 2001 New Orleans; Yale SOM Working Paper No. ICF - 00-03. Available at SSRN: https://ssrn.com/abstract=217168 or http://dx.doi.org/10.2139/ssrn.217168

William N. Goetzmann

Yale School of Management - International Center for Finance ( email )

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203-436-9252 (Fax)

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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Zoran Ivkovich

Michigan State University, Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

K. Geert Rouwenhorst (Contact Author)

Yale School of Management - International Center for Finance ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)

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