Effective Fair Pricing of International Mutual Funds

We propose a new methodology to provide fair prices of international mutual funds by adjusting prices at the individual security level using a comprehensive and economically relevant information set. Stepwise regressions are used to endogenously determine the stock-specific optimal set of factors. U...

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Bibliographic Details
Main Authors: CHUA, Choong Tze, LAI, Sandy, Wu, Yangru
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2008
Subjects:
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/1112
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Institution: Singapore Management University
Language: English
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Summary:We propose a new methodology to provide fair prices of international mutual funds by adjusting prices at the individual security level using a comprehensive and economically relevant information set. Stepwise regressions are used to endogenously determine the stock-specific optimal set of factors. Using 16 synthetic funds whose characteristics are extracted from 16 corresponding actual US-based Japanese mutual funds, we demonstrate that our method estimates fund prices significantly more accurately than existing methods. Although existing fair-pricing methods provide an improvement over the current practice of simply using Japanese market closing prices, they are still highly vulnerable to exploitation by market-timers. By contrast, our method is the most successful in preventing such strategic exploitation since no competing method can profit from our stated prices.