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Mutual funds, part II: fund flows and security returns

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  • Peter Fortune
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    Abstract

    Mutual funds played a very small role in the financial system until the 1970s, before which ownership of financial instruments was dominated by commercial banks, thrift institutions, insurance companies, and pension funds. The financial system of the 1990s is not simply the system of the 1970s with more mutual funds, however. Evolution in financial laws and regulations, increasing global interactions, the rise of new financial instruments, major shifts in the structure and nature of financial institutions, and a change in the locus of risk-bearing from institutions to individuals have also shaped investors' decisions.> The goal of this study is to assess the historical evidence to see whether the interactions between mutual fund inflows and outflows and asset prices are potentially destabilizing to security markets. The author addresses some issues of shareholder behavior and the differences between direct ownership and pooled ownership of securities. He presents an econometric analysis of the interactions between security returns and mutual fund flows, and he uses his model to trace out the effect of shocks to security returns and fund flows. In contrast to previous studies, he finds that security returns do affect future fund flows, and that some fund flows do affect future security returns. But he finds no persistence in security returns—shocks to, say, stock returns do not imply further changes in stock returns, so the rationale for momentum trading over a longer period finds no support.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (1998)
    Issue (Month): Jan ()
    Pages: 3-22

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    Handle: RePEc:fip:fedbne:y:1998:i:jan:p:3-22

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    Keywords: Mutual funds ; Securities;

    References

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    1. Warther, Vincent A., 1995. "Aggregate mutual fund flows and security returns," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 209-235.
    2. Davidson, Wallace N, III & Dutia, Dipa, 1989. "A Note on the Behavior of Security Returns: A Test of Stock Market Overreaction and Efficiency," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(3), pages 245-52, Fall.
    3. Peter Fortune, 1997. "Mutual funds, part I: reshaping the American financial system," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 45-72.
    4. Eli M. Remolona & Paul Kleiman & Debbie Gruenstein, 1997. "Market returns and mutual fund flows," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 33-52.
    5. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
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    Cited by:
    1. Watson, John & Wickramanayake, J., 2012. "The relationship between aggregate managed fund flows and share market returns in Australia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 451-472.
    2. Syriopoulos, Theodore, 2002. "Risk aversion and portfolio allocation to mutual fund classes," International Review of Economics & Finance, Elsevier, vol. 11(4), pages 427-447.
    3. David Ling & Gianluca Marcato & Patrick McAllister, 2008. "The Dynamics of Asset Prices and Transaction Activity in Illiquid Markets: The Case of Private Commercial Real Estate," Real Estate & Planning Working Papers rep-wp2008-11, Henley Business School, Reading University.
    4. E Philip Davis, 2005. "Challenges Posed by Ageing to Financial and Monetary Stability*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 30(4), pages 542-564, October.
    5. Gallagher, David R. & Gardner, Peter & Swan, Peter L., 2009. "Portfolio pumping: An examination of investment manager quarter-end trading and impact on performance," Pacific-Basin Finance Journal, Elsevier, vol. 17(1), pages 1-27, January.
    6. Alexakis, Christos & Niarchos, Nikitas & Patra, Theopfano & Poshakwale, Sunil, 2005. "The dynamics between stock returns and mutual fund flows: empirical evidence from the Greek market," International Review of Financial Analysis, Elsevier, vol. 14(5), pages 559-569.

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