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The relationship between aggregate managed fund flows and share market returns in Australia

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  • Watson, John
  • Wickramanayake, J.

Abstract

This paper presents the relation between aggregate equity managed fund flows and excess share market returns in Australia and evaluates the issue of causality therein. Using a large data set of 3613 managed funds for the period January 1990 to September 2009, the paper addresses two important questions yet to be addressed within the Australian market: First, for research question one; it aims to determine whether a positive feedback process exists between aggregate equity managed fund flows and excess share market returns. Second, for research question two; it examines the relation between unexpected aggregate equity managed fund flows and excess share market returns. The empirical findings contribute to the literature by confirming, in Australia, aggregate equity managed fund flows do not Granger-cause excess share market returns; however, compelling evidence reveals that share market returns do in fact Granger-cause managed fund flows. These findings support those of Edwards and Zhang (1998), who find similar evidence for the United States over the sample period 1961–1996. In addition, aggregate equity managed fund flows are found to be positively related to excess share market returns, indicating herding behavior.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:intfin:v:22:y:2012:i:3:p:451-472
    DOI: 10.1016/j.intfin.2012.02.001
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    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.
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    More about this item

    Keywords

    Managed Funds; Performance; Fund flows; Granger causality;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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