Stale or Sticky Stock Prices? Non-Trading, Predictability, and Mutual Fund Returns
The observed predictability in indexes and domestic mutual funds has been attributed to stale prices. Market timing of mutual funds exploits this predictability. We show that there are few stale prices for stocks in the top few deciles of market value and that mutual funds concentrate their holding in these deciles. Still, we observe predictability in the returns of portfolios and mutual funds holding these stocks. Much of this predictability is due to stickiness, or momentum, in market returns and not stale prices. Thus, the often suggested use of “fairvalue” accounting will not eliminate the profitability of market timing.