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The Wildcard Option in Transacting Mutual-Fund Shares

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  • John M.R. Chalmers
  • Roger M. Edelen
  • Gregory B. Kadlec

Abstract

This study documents high-frequency (daily) mutual fund return autocorrelations and examines the causes and consequences. We assert the cause to be nonsynchronous trading in the underlying assets of the fund, which presents investors with an option to (indirectly) trade those assets at stale prices. We refer to this option as the mutual-fund wildcard option. We show that investors who exploit this option can make abnormal returns of about 1.20% with only four (roundtrip) trades in fund shares. Approximately 45% of the equity fund universe allow this frequency of transacting without load or transaction fees. Using data on the daily flow into and out of individual mutual funds, we find some evidence that investors exploit this wildcard option.

Suggested Citation

  • John M.R. Chalmers & Roger M. Edelen & Gregory B. Kadlec, 1999. "The Wildcard Option in Transacting Mutual-Fund Shares," Center for Financial Institutions Working Papers 00-03, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:00-03
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    References listed on IDEAS

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    Cited by:

    1. James J. Choi & David Laibson & Andrew Metrick, "undated". "Does the Internet Increase Trading? Evidence from Investor Behavior in 401(K) Plans," Rodney L. White Center for Financial Research Working Papers 15-00, Wharton School Rodney L. White Center for Financial Research.
    2. Goetzmann, William N. & Ivković, Zoran & Rouwenhorst, K. Geert, 2001. "Day Trading International Mutual Funds: Evidence and Policy Solutions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(3), pages 287-309, September.
    3. Miller, Edward M. & Prather, Larry J., 2000. "Exploitable patterns in retirement annuity returns: evidence from TIAA/CREF," Financial Services Review, Elsevier, vol. 9(3), pages 219-230, 00.
    4. William Goetzmann & Zoran Ivkovich & K. Rouwenhorst, 2000. "Day Trading International Mutual Funds: Evidence And Policy Solutions," Yale School of Management Working Papers ysm138, Yale School of Management, revised 01 Jun 2001.

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