Sitting bucks: Stale pricing in fixed income funds

Jaewon Choi, Mathias Kronlund, Ji Yeol Jimmy Oh

Research output: Contribution to journalArticlepeer-review

Abstract

We find evidence of widespread stale pricing in bond mutual funds and the resulting risks of dilution and fragility. A principal driver of this phenomenon is the high illiquidity of funds’ holdings, which makes accurate pricing difficult and provides funds with greater discretion over valuation. Consequently, net asset values (NAVs) are extremely stale and fund returns are predictable over several days and weeks, particularly during market crises. Opportunistic traders withdraw capital from overvalued funds, exacerbating the risk of fund runs, while buy-and-hold investors face annual dilution of around $1.2 billion. Our results highlight adverse consequences of insufficient fair valuation practices that remain pervasive even after corrective regulations that followed the 2003 market-timing scandal.

Original languageEnglish
JournalJournal of Financial Economics
DOIs
Publication statusAccepted/In press - 2021

Bibliographical note

Funding Information:
Bill Schwert was the editor for this article. We thank an anonymous referee, Kevin Crotty, Jennifer Huang, Stacey Jacobsen, Hao Jiang, Shinwoo Kang, Noolee Kim, Anya Kleymenova, Alberto Manconi, David Maslar, Jayoung Nam, Jay Ritter, Giorgia Simion, Matthew Spiegel, Laura Starks, Chuck Trzcinka, Eric Zitzewitz, and conference and seminar participants at the 2019 AIM Investment Conference, the 2018 CAFM, the 2020 EFA, the 2019 European Winter Finance Summit, the 2019 Kentucky Finance Conference, the 2019 FMA, the 2019 MFA, the 2020 SEC Financial Regulation Conference, the 2019 University of Connecticut Finance Conference, the 2020 WFA, the 2nd World Symposium on Investment Research, Hong Kong Polytechnic University, KAIST, the PBC School at Tsinghua University, the University of Illinois at Urbana-Champaign, and the University of Wisconsin-Milwaukee for helpful comments and suggestions. Keun Woo Park provided excellent research assistance. Choi and Oh acknowledge financial support from IREC, The Institute of Finance and Banking, Seoul National University.

Funding Information:
Bill Schwert was the editor for this article. We thank an anonymous referee, Kevin Crotty, Jennifer Huang, Stacey Jacobsen, Hao Jiang, Shinwoo Kang, Noolee Kim, Anya Kleymenova, Alberto Manconi, David Maslar, Jayoung Nam, Jay Ritter, Giorgia Simion, Matthew Spiegel, Laura Starks, Chuck Trzcinka, Eric Zitzewitz, and conference and seminar participants at the 2019 AIM Investment Conference, the 2018 CAFM, the 2020 EFA, the 2019 European Winter Finance Summit, the 2019 Kentucky Finance Conference, the 2019 FMA, the 2019 MFA, the 2020 SEC Financial Regulation Conference, the 2019 University of Connecticut Finance Conference, the 2020 WFA, the 2nd World Symposium on Investment Research, Hong Kong Polytechnic University, KAIST, the PBC School at Tsinghua University, the University of Illinois at Urbana-Champaign, and the University of Wisconsin-Milwaukee for helpful comments and suggestions. Keun Woo Park provided excellent research assistance. Choi and Oh acknowledge financial support from IREC, The Institute of Finance and Banking, Seoul National University.

Publisher Copyright:
© 2021

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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