Advanced Search
MyIDEAS: Login to save this paper or follow this series

The (Bad?) Timing of Mutual Fund Investors

Contents:

Author Info

  • Braverman, Oded
  • Kandel, Shmuel
  • Wohl, Avi

Abstract

This paper provides a new look at the timing of mutual fund investors. We re-examine the relationship between investors' aggregate net flows into and out of the funds and the returns of the funds in subsequent periods. The negative relationship that we find (using monthly data of aggregate US equity mutual funds in the years 1984-2003 and a statistical test based on bootstrapping of returns) causes mutual fund investors, as a group, to realize a lower long-term accumulated return than the long-term accumulated return on a 'buy and hold' position in these funds. The 'bad' performance of mutual fund investors can be explained either by 'behavioural explanations' such as investor sentiment or by 'rational market explanations' that are based on time-varying risk premiums. We present a simple overlapping-generation model which predicts a negative relationship between flows and subsequent returns. It is assumed that flows into and out of funds are not related to information about future cash flows (dividends), but are caused by changes in other factors affecting the demand for stocks. Hence, a positive (negative) net flow in a given month implies a positive (negative) price change in the same month, but also lower (higher) expected future returns. We show that in each month the change in the expected future returns may be small (relative to the return variance), but the accumulated effect of these changes may be significant. This result may explain why previous studies, using monthly data of flows and returns in either simple regression models or VAR, could not have significantly detected the monthly change in the expected future returns even in a 15-year sample.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cepr.org/pubs/dps/DP5243.asp
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5243.

as in new window
Length:
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:cpr:ceprdp:5243

Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information:
Email:

Related research

Keywords: market timing; mutual funds; time-varying expected returns;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Campbell, John, 2000. "Asset Pricing at the Millennium," Scholarly Articles 3294737, Harvard University Department of Economics.
  2. Mosebach, Michael & Najand, Mohammad, 1999. "Are the Structural Changes in Mutual Funds Investing Driving the U.S. Stock Market to Its Current Levels?," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 22(3), pages 317-29, Fall.
  3. Edelen, Roger M. & Warner, Jerold B., 2001. "Aggregate price effects of institutional trading: a study of mutual fund flow and market returns," Journal of Financial Economics, Elsevier, vol. 59(2), pages 195-220, February.
  4. Franklin Edwards & Xin Zhang, 1998. "Mutual Funds and Stock and Bond Market Stability," Journal of Financial Services Research, Springer, vol. 13(3), pages 257-282, June.
  5. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
  6. William N. Goetzmann & Massimo Massa, 1999. "Index Funds and Stock Market Growth," NBER Working Papers 7033, National Bureau of Economic Research, Inc.
  7. Warther, Vincent A., 1995. "Aggregate mutual fund flows and security returns," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 209-235.
  8. Frazzini, Andrea & Lamont, Owen A., 2008. "Dumb money: Mutual fund flows and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 88(2), pages 299-322, May.
  9. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  10. Geert Bekaert & Campbell R. Harvey & Robin L. Lumsdaine, 1999. "The Dynamics of Emerging Market Equity Flows," NBER Working Papers 7219, National Bureau of Economic Research, Inc.
  11. Franklin Fant, L., 1999. "Investment behavior of mutual fund shareholders: The evidence from aggregate fund flows," Journal of Financial Markets, Elsevier, vol. 2(4), pages 391-402, November.
  12. Santini, Donald L. & Aber, Jack W., 1998. "Determinants of net new money flows to the equity mutual fund industry," Journal of Economics and Business, Elsevier, vol. 50(5), pages 419-429, September.
  13. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
  14. Grinblatt, Mark & Keloharju, Matti, 2000. "The investment behavior and performance of various investor types: a study of Finland's unique data set," Journal of Financial Economics, Elsevier, vol. 55(1), pages 43-67, January.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Ciccotello, Conrad & Greene, Jason & Ling, Leng & Rakowski, David, 2011. "Capacity and factor timing effects in active portfoliomanagement," Journal of Financial Markets, Elsevier, vol. 14(2), pages 277-300, May.
  2. Amil Dasgupta & Andrea Prat & Michela Verardo, 2010. "Institutional Trade Persistence and Long-term Equity Returns," FMG Discussion Papers dp661, Financial Markets Group.
  3. Alexakis, Christos & Dasilas, Apostolos & Grose, Chris, 2013. "Asymmetric dynamic relations between stock prices and mutual fund units in Japan. An application of hidden cointegration technique," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 1-8.
  4. Friesen, Geoffrey C. & Sapp, Travis R.A., 2007. "Mutual fund flows and investor returns: An empirical examination of fund investor timing ability," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2796-2816, September.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:5243. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.