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Behavioral Factors in Mutual Fund Flows

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  • Massimo Massa
  • William Goetzmann
  • K. Rouwenhorst

Abstract

Using a sample of daily net flows to nearly 1,000 U.S. mutual funds over a year and a half period, we identify a set of systematic factors that explain a significant amount of the variation in flows. This suggests the existence of a common component to mutual fund investor behavior and indicates which asset classes may be regarded as economic substitutes by the participants in the market for mutual fund shares. We find that flows into equity funds -- both domestic and international -- are negatively correlated to flows to money market funds and precious metals funds. This suggests that investor rebalancing between cash and equity explains a significant amount of trade in mutual fund shares. The negative correlation of equities to metals suggests that this timing is not simply due to liquidity concerns, but rather to sentiment about the equity premium. We address the question of whether behavioral factors spread returns by using the mutual fund flow factors as pre-specified regressors in a Fama-MacBeth asset pricing framework. We find that the factors derived from flows

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm8.

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Date of creation: 01 Mar 2000
Date of revision: 01 Jan 2001
Handle: RePEc:ysm:somwrk:ysm8

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Cited by:
  1. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
  2. Jessica Tjornhom Donohue & Kenneth A. Froot, 2002. "The Persistence of Emerging Market Equity Flows," NBER Working Papers 9241, National Bureau of Economic Research, Inc.
  3. A. Clark, 2006. "Modeling the net flows of U.S. mutual funds with stochastic catastrophe theory," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 50(4), pages 659-669, 04.
  4. David Ling & Andy Naranjo, 2006. "Dedicated REIT Mutual Fund Flows and REIT Performance," The Journal of Real Estate Finance and Economics, Springer, vol. 32(4), pages 409-433, June.
  5. Froot, Kenneth A. & Donohue, Jessica Tjornhom, 2004. "Decomposing the persistence of international equity flows," Finance Research Letters, Elsevier, vol. 1(3), pages 154-170, September.
  6. James J. Choi & David Laibson & Andrew Metrick, . "Does the Internet Increase Trading? Evidence from Investor Behavior in 401(K) Plans," Rodney L. White Center for Financial Research Working Papers 15-00, Wharton School Rodney L. White Center for Financial Research.
  7. Barberis, Nicholas & Shleifer, Andrei, 2003. "Style investing," Journal of Financial Economics, Elsevier, vol. 68(2), pages 161-199, May.
  8. Takeshi Yamaguchi & Olivia Mitchell & Gary Mottola & Steven Utkus, 2007. "Winners and Losers: 401(k) Trading and Portfolio Performance," Working Papers wp154, University of Michigan, Michigan Retirement Research Center.
  9. Takeshi Yamaguchi, 2006. "Understanding Trading Behavior in 401(k) Plans," Working Papers wp125, University of Michigan, Michigan Retirement Research Center.
  10. Stephen J. Brown & William N. Goetzmann & Takato Hiraki & Noriyoshi Shirishi & Masahiro Watanabe, 2003. "Investor Sentiment in Japanese and U.S. Daily Mutual Fund Flows," NBER Working Papers 9470, National Bureau of Economic Research, Inc.
  11. Eric Zitzewitz, 2003. "Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(2), pages 245-280, October.
  12. Syriopoulos, Theodore, 2002. "Risk aversion and portfolio allocation to mutual fund classes," International Review of Economics & Finance, Elsevier, vol. 11(4), pages 427-447.
  13. Kenneth A. Froot & Tarun Ramadorai, 2001. "The Information Content of International Portfolio Flows," NBER Working Papers 8472, National Bureau of Economic Research, Inc.
  14. Kauko , Karlo, 2005. "The demand for money market mutual funds," Research Discussion Papers 14/2005, Bank of Finland.
  15. Th. Fiotakis & N. Philippas, 2004. "Chasing trend and losing money: open end mutual fund investors' trading behaviour in Greece," Applied Economics Letters, Taylor and Francis Journals, vol. 11(2), pages 117-121.

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