Sitting Bucks: Zero Returns in Fixed Income Funds

85 Pages Posted: 23 Sep 2018 Last revised: 25 Feb 2020

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance

Mathias Kronlund

Tulane University

Ji Yeol Jimmy Oh

Hanyang University

Date Written: February 24, 2020

Abstract

Zero returns are widely prevalent in fixed-income funds: on more than 30% of trading days, net asset values (NAVs) do not change. A principal driver of this phenomenon is the high illiquidity of funds’ holdings, and further evidence hints at a strategic unwillingness on the part of these funds to immediately reflect losses. Consequently, fund NAVs are extremely stale, making fund returns 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 $3 billion when others opportunistically buy and sell at incorrect prices. Our results highlight worsening consequences of insufficient fair-valuation practices even after the corrective regulations that followed the 2003 market-timing scandal.

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 (February 24, 2020). 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

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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