Sitting Bucks: Zero Returns in Fixed Income Funds

72 Pages Posted: 23 Sep 2018 Last revised: 3 Sep 2019

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance

Mathias Kronlund

University of Illinois at Urbana-Champaign

Ji Yeol Jimmy Oh

Hanyang University

Date Written: August 31, 2019

Abstract

Zero returns are highly prevalent in fixed-income funds: on more than 30% of trading days, net asset values (NAVs) do not change. High illiquidity of fund holdings drives this phenomenon, which is further compounded by binding minimum ticks. Consequently, NAVs are extremely stale, and fund returns are highly predictable at daily, weekly, and even monthly horizons. Investors respond by withdrawing capital from overvalued funds, exacerbating the risk of fund runs, while buy-and-hold investors face annual dilution costs of around $2 billion when others opportunistically buy and sell at incorrect prices. Our results reveal persisting shortcomings in existing fair valuation regulations that should correct this problem.

Keywords: Fixed income 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: Zero Returns in Fixed Income Funds (August 31, 2019). 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

Mathias Kronlund

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
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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