Day trading international mutual funds: Evidence and policy solutions

Daily pricing of mutual funds provides liquidity to investors but is subjec t to valuation errors due to the inability to observe synchronous, fair sec urity 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 pricing errors. We show that mut ual 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 inter national mutual funds. We propose a simple "fair pricing" mechanism that al leviates 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 fair pricing to investors, which, in turn, decreases t he need to resort to monitoring for day traders and redemption penalties.