Abstract
Daily of mutual funds provides liquidity to investors but is subject to valuation errors due to the inability to observe synchronous, security prices at the end of the trading day. This may hurt fund investors if speculators strategically seek to exploit mispricing or if the net flow of money into funds is correlated with these errors. 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 alleviates these concerns by correcting net asset values for stale prices. We argue that fund companies and regulators should look at alternatives that allow funds to offer to investors, which in turn decreases the need to resort to monitoring for day traders and redemption penalties.
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