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Inflation and equity mutual fund flows

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  • Krishnamurthy, Srinivasan
  • Pelletier, Denis
  • Warr, Richard S.

Abstract

We document a negative relation between inflation and aggregate equity mutual fund flows and hypothesize that this relation is partly due to inflation illusion on the part of investors. Inflation illusion occurs when investors fail to incorporate the effect of inflation into their estimates of nominal growth rates. Consequently, they lower their estimates of the intrinsic values of stocks and move their assets away from equities. Our results are robust to controls for alternative explanations such as inflation proxying for poorer future real cash flow growth and periods of higher inflation being associated with higher equity risk premia.

Suggested Citation

  • Krishnamurthy, Srinivasan & Pelletier, Denis & Warr, Richard S., 2018. "Inflation and equity mutual fund flows," Journal of Financial Markets, Elsevier, vol. 37(C), pages 52-69.
  • Handle: RePEc:eee:finmar:v:37:y:2018:i:c:p:52-69
    DOI: 10.1016/j.finmar.2017.12.001
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    2. Rakowski, David & Yamani, Ehab, 2021. "Endogeneity in the mutual fund flow–performance relationship: An instrumental variables solution," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 247-271.

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    More about this item

    Keywords

    Mutual funds; Fund flows; Inflation illusion; Equity valuation;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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