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Mutual Fund Returns and Market Microstructure.



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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