Effective fair pricing of international mutual funds |
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Authors: | Choong Tze Chua Sandy Lai Yangru Wu |
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Institution: | 1. Lee Kong Chian School of Business, Singapore Management University, 50 Stamford Road, Singapore 178899, Singapore;2. Rutgers Business School – Newark and New Brunswick, Rutgers University, China;3. Chinese Academy of Finance and Development, Central University of Finance and Economics, China |
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Abstract: | 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. |
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Keywords: | G10 G12 G15 |
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