2005-01-09 papers

on Financial Markets

Issue of 2005‒01‒09
two papers chosen by
Erik Schloegl

Structural VAR identification in asset markets using short-run market inefficiencies By Gultekin Isiklar
How Widespread is Late Trading in Mutual Funds? By Eric Zitzewitz

Structural VAR identification in asset markets using short-run market inefficiencies

By:	Gultekin Isiklar (State University of New York at Albany)
Abstract:	We impose a structure on the short-run market inefficiencies in the asset markets and use this structure to identify a structural vector autoregressive model. This novel identification method is based on more reasonable assumptions than the standard approaches and also gives estimates for inefficiency measures in the markets, which are important on their own. Applying our method on the major European stock markets, we find that while the UK shocks were dominant in Europe until 1999, German innovations have been more important since 1999. We also find that the pattern of inefficiencies are consistent with the rational inattention model of Sims (2003).
Keywords:	Structural VAR; Overreaction and Underreaction; Stock Market
JEL:	C32 G15 D84
Date:	2005–01–01
URL:	http://d.repec.org/n?u=RePEc:wpa:wuwpem:0501001&r=fmk

How Widespread is Late Trading in Mutual Funds?

By:	Eric Zitzewitz (ericz@stanford.edu)
Abstract:	This paper uses daily fund flow data to examine the extent of late trading in the U.S. mutual fund industry. Trading decisions that are required by law to have been made before 4 PM Eastern Time are correlated with market movements from 4 to 9 PM that evening. The cross- sectional variation in this correlation is consistent with late trading being its primary cause and inconsistent with alternative explanations. For example, apparent late trading ceases in September 2003 after the announcement of the investigation into mutual fund trading practices, it is three times greater in fund families that have been cited by regulators for allowing late trading, and it is greater in funds and asset classes that are also receiving heavy stale price arbitrage flows. In my sample, which includes 75 percent of non-specialized equity mutual funds and 48 percent of assets, late trading led to average annual shareholder dilution from 1998 to 2003 of 3.8 and 0.9 basis points in international and U.S. equity funds, respectively. If these dilution rates prevailed industry wide, they would imply shareholder losses of about $400 million per year. Furthermore, there is statistically significant evidence of late trading in the funds of 39 of 66 fund families.
JEL:	G28 G23 G24 K42
Date:	2005–01–03
URL:	http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0501002&r=fmk

This issue is ©2005 by Erik Schloegl. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.

General information on the NEP project can be found at https://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.

NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.