The Information and Liquidity Effects of Mutual Fund Flows: Evidence From International Spillovers

Abstract

We decompose mutual fund flow–driven price pressure into liquidity and information components by measuring the extent to which mutual fund flow-driven trading spills over from the United States (US) to 44 international markets. Our procedure shows that liquidity barriers are greater than information barriers between markets, in that non-US stock returns are more strongly associated with US stock returns than with US-based mutual fund price pressure. By using suitably flow-adjusted non-US returns of cross-listed stocks as instruments for US stock returns in the absence of mutual fund price pressure, our procedure shows that mutual fund flow-driven price pressure varies considerably across different markets, stocks, funds, and types of flows. A simple characterization of some mutual fund flows as “fire sales” fails to capture many sources of variation in the relative proportion of information and liquidity components of fund flows.