Sitting Bucks: Stale Pricing in Fixed Income Funds

72 Pages Posted: 23 Sep 2018 Last revised: 15 Jul 2021

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance; Yonsei University - School of Business

Mathias Kronlund

Tulane University

Ji Yeol Jimmy Oh

Hanyang University

Date Written: July 8, 2021

Abstract

We document evidence of widespread stale pricing in bond mutual funds and the resulting risks of dilution and fragility. A principal driver of this phenomenon is the high illiquidity of funds’ holdings, which makes accurate pricing difficult and provides funds with greater discretion over valuation. Consequently, net asset values (NAVs) are extremely stale and fund returns are predictable over several days and weeks, particularly during market crises. Opportunistic traders withdraw capital from overvalued funds, exacerbating the risk of fund runs, while buy-and-hold investors face annual dilution of around $1.2 billion. Our results highlight adverse consequences of insufficient fair-valuation practices that remain pervasive even after corrective regulations that followed the 2003 market-timing scandal.

Keywords: Bond mutual funds, Stale prices, Fund flows, Fund runs

JEL Classification: G11, G14, G23

Suggested Citation

Choi, Jaewon and Kronlund, Mathias and Oh, Ji Yeol Jimmy, Sitting Bucks: Stale Pricing in Fixed Income Funds (July 8, 2021). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3244862 or http://dx.doi.org/10.2139/ssrn.3244862

Jaewon Choi (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://https://sites.google.com/site/jaewchoi1203

Yonsei University - School of Business ( email )

50 Yonsei-ro, Seodaemun-gu
Seoul, 120-749
Korea, Republic of (South Korea)

Mathias Kronlund

Tulane University ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Ji Yeol Jimmy Oh

Hanyang University ( email )

School of Business #513
Wangsimni-ro 222, Seongdong-gu
Seoul, Seoul 04763
Korea, Republic of (South Korea)
+82222202689 (Phone)

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