The Effects of Stale Prices on Mutual Funds

Document Type : Research Paper

Authors

1 Assistant Professor of Economics, Graduate School of Management and Economics, Sharif University of Technology, Tehran, Iran

2 Assistant Professor, Department of Economics and Systems, Institute for Management and Planning Studies, Tehran, Iran

3 Ph. D. Candidate, Department of Economics, University of Texas at Austin, Austin, USA

Abstract

Daily liquidity to investors is promised by mutual funds, which allows them to redeem their money based on the prevailing Net Asset Value (NAV). A number of factors like trading suspension and daily price limits can cause redeemed NAV to deviate from the intrinsic values of fund units. Such “staleness” in prices can create arbitrage opportunities for the investors, who can invest or redeem their money at the expense of other passive investors. Using hand-collected data from quarterly mutual fund holdings, we documented significant deviations between the announced and “true” NAVs of Iranian mutual funds. We found that the investors reacted to and took advantage of such deviations. The wealth transfer between the fund investors was estimated to be approximately 1.3% of Total Net Asset (TNA), which was 4 times larger than the wealth transfer documented in the previous studies.

Keywords

Main Subjects

References

Brown, K. C., Harlow, W. V., & Starks, L. T. (1996). Of tournaments and temptations: An analysis of managerial incentives in the mutual fund industry. The Journal of Finance, 51(1), 85-110. https://doi.org/10.1111/j.1540-6261.1996.tb05203.x
Boudoukh, J., Richardson, M., Subrahmanyam, M., & Whitelaw, R. F. (2002). Stale prices and strategies for trading mutual funds. Financial Analysts Journal, 58(4), 53-71. https://doi.org/10.2469/faj.v58.n4.2454
Chalmers, J. M., Edelen, R. M., & Kadlec, G. B. (2000a). On the perils of security pricing by financial intermediaries: the case of open-end mutual funds (No. 00-37). Wharton School Center for Financial Institutions, University of Pennsylvania.
Chalmers, J., Edelen, R., & Kadlec, G. (2000b). Predictable Changes in NAV: The wildcard option in transacting mutual fund shares. Working Paper, Univ. of Oregon
Chen, Q., Goldstein, I., & Jiang, W. (2010). Payoff complementarities and financial fragility: Evidence from mutual fund outflows. Journal of Financial Economics, 97(2), 239-262. https://doi.org/10.1016/j.jfineco.2010.03.016
Chen, Y., Ferson, W., & Peters, H. (2010). Measuring the timing ability and performance of bond mutual funds. Journal of Financial Economics, 98(1), 72-89. https://doi.org/10.1016/j.jfineco.2010.05.009
Chevalier, J., & Ellison, G. (1999). Career concerns of mutual fund managers. The Quarterly Journal of Economics, 114(2), 389-432. http://dx.doi.org/10.2139/ssrn.130990
Edelen, R. M. (1999). Investor flows and the assessed performance of open-end mutual funds. Journal of Financial Economics, 53(3), 439-466. https://doi.org/10.1016/S0304-405X(99)00028-8
Ferson, W. E. (2010). Investment performance evaluation. Annual. Review of Financial. Economics, 2(1), 207-234. https://doi.org/10.1146/annurev-financial-120209-134007
Goetzmann, W. N., Ivković, Z., & Rouwenhorst, K. G. (2001). Day trading international mutual funds: Evidence and policy solutions. Journal of Financial and Quantitative Analysis, 36(3), 287-309. https://doi.org/10.2307/2676284
Greene, J. T., & Hodges, C. W. (2002). The dilution impact of daily fund flows on open-end mutual funds. Journal of Financial Economics, 65(1), 131-158. https://doi.org/10.1016/S0304-405X(02)00137-X
Grégoire, V. (2013). Do Mutual Fund Managers Adjust NAV for Stale Prices?. Available at SSRN 1928321.
Hosseini, A., Hosseini, H., & Jafari, E. (2014). Relationship between mutual fund flows and the TSE index. Financial Research Journal 15(2), 201-214. (In Persian). https://www.doi.org/10.22059/jfr.2013.51077
Investment Company Institute (2019). 2019 Investment Company Fact Book. 
Khodadadi, V., & Koochak S. F. (2014). The effect of past performance of mutual funds on net fund flows on the Tehran Stock Exchange. Quarterly Journal of Stock Exchange. 7(29), 79-101 (In Persian).
Qian, M. (2011). Stale prices and the performance evaluation of mutual funds. Journal of Financial and Quantitative Analysis, 46(2), 369-394. https://doi.org/10.1017/S0022109010000773
Scholes, M., & Williams, J. (1977). Estimating betas from nonsynchronous data. Journal of Financial Economics, 5(3), 309-327. https://doi.org/10.1016/0304-405X(77)90041-1
Securities., & Exchange Organization (2009). Manual for Determining Buy and Sell Prices in Mutual Funds (In Persian).
Tariverdi, Y., Faraji, M., Daghani, R., & Heidarpour, F. (2013). Analysis of investment funds and companies using the Merton-Hendricks model, Empirical and Accounting Studies, 3(1), 83-99. (In Persian). https://www.doi.org/ 10.22051/jera.2013.572
Zheng, L. (1999). Is money smart? A study of mutual fund investors' fund selection ability. The Journal of Finance, 54(3), 901-933. https://doi.org/10.1111/0022-1082.00131
Zitzewitz, E. (2003). Who cares about shareholders? Arbitrage-proofing mutual funds. Journal of Law, Economics, and Organization, 19(2), 245-280.

Files

Share

How to cite

Statistics