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Mutual Fund Returns and Market Microstructure.

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Abstract

Equity mutual funds earn large positive returns on the last day of the year, and large negative returns on the following day. The same applies on a smaller scale at quarter-ends that aren't month-ends. Empirical evidence from a variety of sources, including portfolio disclosures and intra-day equity transactions, supports the hypothesis proposed in Zweig (1997) that a subset of fund managers deliberately cause the price shifts with buy orders, intending to move return to the current period from the next. Cross-sectional tests show the largest effect in the period's best performers, consistent with their extra incentive to add to their current returns.

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