Aggregate Mutual Fund Flows Research Articles

Mutual funds and stock market volatility: An empirical analysis of Asian emerging markets

We investigate the empirical relationship between aggregate mutual fund flows and stock market volatility in Asian emerging markets by providing a comparative analysis of equity and balanced funds with market-wide volatility. Using a panel vector autoregressive model, we find that market volatility increases with increase in equity fund flows. However, it decreases with increase in balanced fund flows suggesting rational investment behaviour of balanced mutual funds. In addition, equity funds follow the market volatility positively, suggesting positive feedback trading (momentum) behaviour. On the other hand, balanced funds follow market volatility negatively and exhibit negative feedback trading behaviour (contrarian behaviour). We also show that macroeconomic variables influence both fund flows and market volatility. We discuss the implications of the findings for policy makers and portfolio managers.

Mutual funds and market performance: New evidence from ASEAN markets

ABSTRACTThe contemporaneous growth in ASEAN financial markets over the last two decades raises empirical questions regarding the role of institutional investors in financial market performance. Our study examines the dynamic relationship of aggregate mutual fund flows with market performance variables, i.e. stock market returns and volatility in ASEAN financial markets. Findings suggest that equity and balanced flows have a positive (negative) relationship with market returns (volatility), whereas bond and money market flows have a negative (positive) linkage with market returns (volatility). Furthermore, equity and balanced mutual funds contribute towards reducing market volatility. In addition, mutual funds respond concurrently to risk-related information as compared to returns-related information in the stock market. We also identify that risky securities have a stronger relationship with the market variables than less risky securities do. Moreover, investors direct flows away from equity-based funds to fixed income-type funds in times of high market risk.

Aggregate Mutual Fund Flows and Cross-Sectional Anomalies

I examine the explanatory power of aggregate mutual fund flows for the profitability of price-based (i.e., momentum and 52-week high) and non-price-based (i.e., earnings surprises, profitability, share issuance, accrual and asset growth) anomalies in the cross-section of returns. I find that the flow-based trading of mutual funds contributes to mispricing as measured by the profits to price-based anomalies, especially at times when market-wide funding costs are high. The effect also exists for non-price-based anomalies, but only through the dependence of their profits on momentum. My findings support the view of Lou (2012) and Vayanos and Woolley (2013) that mutual funds’ trading on flows creates feedback that strengthens price-based anomalies, as high-performing funds buy additional shares of high-performing stocks and poorly performing funds sell shares of poorly performing stocks. However, the explanatory power of aggregate mutual fund flows for price-based anomaly returns is only partly attenuated by fund-level variables designed to capture the feedback effect. The flow-induced trading by mutual funds appears to contribute to mispricing for reasons beyond the feedback effect.

The Impact of Stock Market Volatility Expectations on Investor Behavior: Evidence From Aggregate Mutual Fund Flows

We find that aggregate net equity fund flows are strongly negatively correlated with changes in expected future stock market volatility as measured by the VIX. Implying that investor purchase decisions are primarily driven by returns and sale decisions by risk perceptions, we further find that changes in the VIX primarily impact aggregate equity mutual fund redemptions with little impact on inflows while stock market returns impact inflows but not outflows. We also find that changes in the VIX are positively correlated with the degree of portfolio rebalancing. While the impact on outflows is much larger, both fund inflows and outflows tend to increase (decrease) when the VIX increases (decreases). Aside from possibly the change in civilian employment, we find no evidence that macroeconomic variables and consumer sentiment have an independent impact on mutual fund flows after controlling for the VIX and stock market returns.

The Price Pressure of Aggregate Mutual Fund Flows

Using a unique database of aggregate daily flows to equity mutual funds in Israel, we find strong support for the “temporary price pressure hypothesis” regarding mutual fund flows: Mutual fund flows create temporary price pressure that is subsequently corrected. We find that flows are positively autocorrelated, and are correlated with market returns (R2 of 20%). Our main finding is that approximately one-half of the price change is reversed within 10 trading days. This support for the “temporary price pressure hypothesis” complements microstructure research concerning price impact and price noise in stocks by indicating price noise at the aggregate market level.

Stock returns and aggregate mutual fund flows: a system approach

To investigate if the mutual fund flows have been a driving factor in the US stock market at the macro level, we combine information from the stock market with information from bond and money markets in a system method. The empirical evidence from Seemingly Unrelated Regression Error Correction Model (SURECM) and Granger and Sims causality tests in a system indicates that the fund flows are weakly exogenous and stock performance causes fund flows, implying that investors move their money to the securities that yield higher returns to rebalance their investment portfolios in the US market.

The Price Pressure of Aggregate Mutual Fund Flows

Using a unique database of aggregate daily flows to equity mutual funds in Israel, we find strong support for the price pressure hypothesis regarding mutual fund flows: Mutual fund flows create temporary price pressure that is subsequently corrected. We find that flows are positively auto-correlated, and are correlated with market returns (R2 of 20%). Our main finding is that approximately one-half of the price change is reversed within ten trading days. This support for the price pressure hypothesis complements microstructure research concerning price impact and price noises in stocks by indicating price noise at the aggregate market level.

Mutual Fund Flows and Extrapolative Investors' Expectations: The German Case

In this paper the relation between aggregate mutual fund flows and stock market returns is analysed with respect to three issues. First, we study the relation between fund flows and long-term realized returns (past, current and future). Second, we find out that fund flows are not driven by fundamentally expected returns. Mutual fund investors appear to have naive expectations, as it seems that they just extrapolate past price trends into the future. This leads to a substantial performance loss of more than one percentage point per year. Third, the firstly presented results of the German fund market resemble those of the US market. Differences between the two fund markets do not seem to influence investor behaviour.

Aggregate Mutual Fund Flows and Subsequent Market Returns

This paper re-examines the relation between aggregate US equity mutual fund flows and the equity market returns in subsequent periods. Investigating aggregate monthly data in the years 1984-2003, we find a positive contemporaneous relation between flows and returns. This price change is partially reversed in the following nine months. The negative relation between flows and subsequent returns is consistent with risk premium changes that are negatively related to price changes and it causes mutual fund investors, as a group, to realize a long-term accumulated return that is lower than the long-term accumulated return on a buy-and-hold position in these funds.

Captação de recursos por fundos de investimento e mercado de ações

O presente artigo analisa a relação contemporânea e defasada entre fluxos de entrada e saída de recursos nos fundos de ações no Brasil e o desempenho de alguns ativos fundamentais, tais como o Índice Bovespa, a taxa de câmbio comercial e a taxa de juros no mercado interbancário. Os principais objetivos do trabalho são (1) encontrar evidências de que o fluxo de recursos depende do desempenho desses ativos, com particular atenção para o Índice Bovespa, e (2) verificar se as estatísticas de captação de recursos podem ser utilizadas para prever preços futuros, principalmente o valor da carteira do Índice Bovespa. Com o auxílio de diversas ferramentas de análise de séries temporais, são obtidos resultados que indicam haver evidências da dependência entre captação de recursos e desempenho do Índice, mas que o conhecimento do fluxo de recursos não ajuda a prever seu o desempenho futuro, resultado compatível com a eficiência semiforte do mercado brasileiro de ações.

Returns-Chasing Behavior, Mutual Funds, and Beta's Death

I develop an agency model where returns-chasing behavior by mutual fund investors causes beta not to be priced to the degree predicted by the standard CAPM. Mutual fund investors chase returns through time, precipitating unusually large aggregate cash inflows into mutual funds just after dramatic market runups. Mutual fund investors also chase returns cross-sectionally across funds so that the highest-performing funds capture the largest fraction of the aggregate inflows into the mutu al fund sector. The interaction of these two flow-performance relationships induces an asymmetry in payoffs to mutual funds where fund managers care most about outperforming peers during bull markets. Since high-beta stocks tend to outperform in up markets, active fund managers tilt their portfolios toward high-beta stocks, reducing the beta risk premium in equilibrium. To support the model's time-series flow-performance assumption, I show empirically that market returns have a large economic impact on subsequent aggregate mutual fund flows. In addition, data on mutual fund holdings suggest that the aggregate stock portfolio held by equity funds is overweighted in high-beta stocks relative to the overall market, though this does not include the cash held by mutual funds. Fama-MacBeth tests indicate that the equity premium falls only slightly as the relative size of mutual funds increases, and the relation is not statistically significant.

Returns-Chasing Behavior, Mutual Funds and Beta's Death

I develop an agency model where returns-chasing behavior by mutual fund investors causes beta not to be priced to the degree predicted by the standard CAPM. Mutual fund investors chase returns through time, precipitating unusually large aggregate cash inflows into mutual funds just after dramatic market runups. Mutual fund investors also chase returns cross-sectionally across funds. Each period, mutual funds compete in tournaments where the highest-performing funds capture the largest fraction of the aggregate inflows into the mutual fund sector. The interaction between these two flow-performance relationships induces an asymmetry in payoffs to mutual funds such that equity fund managers care most about outperforming peers during bull markets. Since high-beta stocks tend to outperform low-beta stocks in up markets, active fund managers tilt their portfolios toward high-beta stocks, reducing the expected return to these securities in equilibrium. Thus, the presence of actively-managed mutual funds causes beta risk to be priced to a lesser degree than otherwise. Interestingly, the literature suggests that beta died in the early 1980s, coinciding with the spectacular growth of the mutual fund industry in the U.S. To support the model's time-series flow-performance assumption, I show empirically that market returns have a large economic impact on subsequent aggregate mutual fund flows. In addition, data on mutual fund holdings support the model's prediction that the aggregate stock portfolio held by equity mutual funds is over-weighted in high-beta stocks relative to the overall market.

Aggregate mutual fund flows and security returns

In this paper I find that aggregate security returns are highly correlated with concurrent unexpected cash flows into mutual funds, but unrelated to concurrent expected flows. An unexpected inflow equal to 1% of total stock fund assets ($4.75 billion) corresponds to a 5.7% increase in the stock price index. Further, fund flows are correlated with the returns of the securities held by the funds, but not with the returns of other types of securities. I find evidence of a positive relation between flows and subsequent returns and evidence of a negative relation between returns and subsequent flows.