Effective Fair Pricing of International Mutual Funds

52 Pages Posted: 17 Mar 2005 Last revised: 3 Jun 2012

See all articles by Choong Tze Chua

Choong Tze Chua

Singapore Management University

Sandy Lai

University of Hong Kong

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Date Written: October 11, 2005

Abstract

We propose a new methodology to provide fair prices of international mutual funds by adjusting prices at the individual securities level using a comprehensive and economically relevant information set. Stepwise regressions are used to endogenously determine the stock-specific optimal set of instruments in estimating the fair price of each stock in a fund. We compare the performance of our approach with existing ones using 16 U.S.-based Japanese funds. Our method predicts significantly more accurately fund prices at next-day Japan open, which are the best proxies for the unobserved prices at U.S. close. The existing methods are shown to be highly vulnerable to speculative attacks while our method is the most successful in preventing such strategic exploitation in that no competing method can profit significantly from our stated price. Our method can profit from the existing methods significantly by between 12 to 40 percent annually. Simulation results show that our method is superior to existing ones regardless of the style of the funds, such as different turnover ratios, stock sizes, number of stocks in a fund, and book-to-market ratios.

Keywords: Stale pricing, Fair pricing, International mutual funds, Stepwise regression

JEL Classification: G10, G12, G15

Suggested Citation

Chua, Choong Tze and Lai, Sandy and Wu, Yangru, Effective Fair Pricing of International Mutual Funds (October 11, 2005). Available at SSRN: https://ssrn.com/abstract=682369 or http://dx.doi.org/10.2139/ssrn.682369

Choong Tze Chua

Singapore Management University ( email )

50 Stamford Rd.
Singapore 912409, 178899
Singapore

Sandy Lai

University of Hong Kong ( email )

Faculty of Business and Economics
K.K. Leung Building, Pokfulam Road
Hong Kong, Pokfulam HK
Hong Kong

Yangru Wu (Contact Author)

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
152
Abstract Views
1,494
rank
217,790
PlumX Metrics