Stale Prices: Empirical studies generally require a series of current prices, and, unless the price formation process is observed continuously, this is impossible to achieve and stale prices must be used.
The problem of stale prices can be avoided by analysing trades in trade time (or quotes in quote time).
This is most helpful for ETFs that invest in domestic securities, however, because the INAV may reflect
stale prices of foreign securities in markets that are closed.
That means that the fund's current net asset value relies on
stale prices for 24 stocks out of a total of 28.
Unlike hedge funds, which as unregulated or loosely regulated entities selling mainly to sophisticated investors can afford to value a portfolio infrequently and even make use of
stale prices, mutual funds are regulated entities obliged to produce a daily NAV using the most accurate, clean and up-to-date prices available.
Asness, Krail, and Liew [16] argue that the presence of
stale prices due to illiquidity or managed pricing can artificially reduce estimates of volatility and correlation with traditional indices.
Other investors were allowed to conduct market timing trades to take advantage of
stale prices used by funds to calculate their net asset values at funds with stated policies against such trading.
Someone who can buy or sell to exploit the gap between
stale prices and real prices - a "market timer" - can make a killing.
Yet, clearly premiums exist and cannot be explained away as artifacts of
stale prices.
As a result any nontrading bias in the basis due to
stale prices should be small.
Market timing refers to the short-term trading of fund shares to take advantage of
stale prices for foreign or illiquid securities held by the fund, or to utilize the fund's liquidity in a way that is harmful to other shareholders.
Commenting on the importance of this topic, Will Goetzmann, Professor of Finance at Yale School of Management stated, "Multiple studies have shown how the average investor may be hurt by speculators seeking to exploit the
stale prices of mutual funds.
