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Behavioral Factors in Mutual Fund Flows

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Author Info
WILLIAM N. GOETZMANN () (Yale School of Management, International Center for Finance)
MASSIMO MASSA () (INSEAD - Department of Finance)
K. GEERT ROUWENHORST () (Yale School of Management, International Center for Finance)

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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 alone explain as much as 45% of the cross-sectional variation in mutual fund returns. The fund flow factors provide significant incremental explanatory power in the cross-sectional regressions on daily returns. We consider a number of alternatives to explain our evidence including causality from returns to flows and vice-versa. Our evidence is consistent with the existence of a pervasive investor sentiment variable.

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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: 03 Feb 2004
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Handle: RePEc:ysm:somwrk:ysm8

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G1 - Financial Economics - - General Financial Markets
G2 - Financial Economics - - Financial Institutions and Services

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  1. 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. [Downloadable!] (restricted)
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  2. James J. Choi & David Laibson & Andrew Metrick, 2000. "Does the Internet Increase Trading? Evidence from Investor Behavior in 401(k) Plans," NBER Working Papers 7878, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Kenneth A. Froot & Jessica D. Tjornhom, 2002. "Decomposing the Persistence of International Equity Flows," NBER Working Papers 9079, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Kenneth A. Froot & Tarun Ramadorai, 2001. "The Information Content of International Portfolio Flows," NBER Working Papers 8472, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Julie Agnew, 2004. "An Analysis Of How Individuals React To Market Returns In One 401(k) Plan," Working Papers, Center for Retirement Research at Boston College 2004-13, Center for Retirement Research. [Downloadable!]
  6. Kauko , Karlo, 2005. "The demand for money market mutual funds," Research Discussion Papers 14/2005, Bank of Finland. [Downloadable!]
  7. 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. [Downloadable!] (restricted)
  8. Zitzewitz, Eric, 2002. "Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds," Research Papers 1749, Stanford University, Graduate School of Business. [Downloadable!]
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  9. 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. [Downloadable!]
  10. 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, February. [Downloadable!] (restricted)
  11. Takeshi Yamaguchi, 2006. "Understanding Trading Behavior in 401(k) Plans," Working Papers wp125, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
  12. Nicholas Barberis & Andrei Shleifer, 2000. "Style Investing," NBER Working Papers 8039, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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