Sitting bucks: Stale pricing in fixed income funds

Jaewon Choi, Mathias Kronlund, Ji Yeol Jimmy Oh

Research output: Contribution to journalArticlepeer-review

9 Citations (Scopus)

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
Pages (from-to)296-317
Number of pages22
JournalJournal of Financial Economics
Volume145
Issue number2
DOIs
Publication statusPublished - 2022 Aug

Bibliographical note

Publisher Copyright:
© 2021

All Science Journal Classification (ASJC) codes

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

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