Skip to main content

Day Trading International Mutual Funds: Evidence and Policy Solutions

  • William N. Goetzmann, Zoran Ivković and K. Geert Rouwenhorst

Daily pricing of mutual funds provides liquidity to investors but is subject to valuation errors due to the inability to observe synchronous, fair security prices at the end of the trading day. This mayhurt fund investor if speculatior strategiclly seek to exploit mispricing or if the net flow of money into funds is correlated with these pricing eerrors. We show that mutual funds are exposed to speculative traders by using a simple day trading rule that yields large profits in a sample of 391 U.S.-based open-end international mutual funds. We propose a simple “fair pricing” mechanism that alleviated these concerns by correcting net asset values for stale prices. We argue that fund companies and regulatiors should look at alternatives that allow funds to offer fair prciing to investors, which, in turn, decreases the need to resort to monitoring for day traders and redemption penalties.

Hide All
About Mutual Fund Investing at Schwab. available at (1999).
Chalmers, J. M. R.; Edelen, R. M.; and Kadlec, G.. “Predictable Changes in NAV: The Wildcard Option in Transacting Mutual Fund Shares”. Working Paper, Univ. of Oregon (1999).
Chance, D., and Hemler, M.. “The Perfomance of Professional Market Timers: Daily Evidence from Executed Strategies”. Working Paper, Virginia Tech (1999).
Craig, A.; Dravid, A.; and Richardson, M.. “Market Efficienty around the Clock: Some Supporting Evidence Using Foreign Based Derivatives.” Journal of Financial Economices, 39 (1995), 161180.
Edelen, R. M., and Warner, J.. “Aggregate Price Effects of Institutional Trading: a Study of Mutual Fund Flow and Market Returns”. Jounal of Financial Economics, 59 (2001), 195220.
Eun, C. S., and Shim, S.. “International Transmission of Stock Market Movements”. Journal of Financial and Quantitative Analysis, 24 (1989), 241256.
French, K., and Roll, R.. “Stock Return Variances: the Arrival of Information and the Reaction of Traders”. Jounal of Financial Economices, 17 (1986), 526.
Giudice, J.Custodians Meeting New Challenges: Foreign Markets Present Problems”. Pensions and Investments, 22 (1994), 1934.
Greene, J. T., and Hodges, C. W.. “The Dilution Impact of Daily Fund Flows on Open-End Mutual Funds”. Working Paper, Georgia State Univ. (2000).
Hamao, Y.; Masulis, R. W.; and Ng, V.. “Correlations in Price Changes and Volatility Across Internationa Stock Markets”. Review of Financial Studies, 3 (1990), 281307.
Hilliard, J. E.The Relation Between Equity Indices on World Exchanges”. Journal of Finance, 34 (1979), 103114.
Investment Company Act. 17 C.F.R. §270 (1940).
Karolyi, A., and Stulz, R.. “Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Co-Movements”. Journal of Finance, 51 (1996), 951986.
King, M. A., and Wadwhani, S.. “Transmission of Volatility Between Stock Markets”. Review of Financial Studies, 3 (1990), 533.
Lo, A. W., and MacKinaly, A. C.. “Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Tesst.” Review of Financial Studies, 1 (1988) 4166.
Neumark, D.; Tinsley, P. A.; and Tosini, S.. “After-Hours Stock Prices and Post-Crash Hang-Overs”. Journal of Finance, 46 (1991), 159178.
Newey, W., and West, K.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covarinance Matrix”. Econometrica, 55 (1987) 703708.
Vanguard International Value Fund Prospectua, available at (1999)
Wyatt, E. “The Market Turmoil: The Funds; Fidelity Invokes Fine Print and Angers Some Customers”. New York Times (10 31, 1997), D6.
Zitzewitz, E.Daily Mutual Fund Net Asset Value Predictability and The Associated Trading Profit Oportunity”. Woking Paper, Sloan School of Management, MIT (2000).
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed