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Mutual fund risk and market share-adjusted fund flows

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  • Spiegel, Matthew
  • Zhang, Hong

Abstract

Several papers use a fractional specification (net inflow/ assets under management) to infer a convex relation between flow and past performance. However, heterogeneous linear response functions combined with the pooled analysis commonly used in these studies can yield false convexity estimates. We show that such heterogeneity obtains in practice. Along these same lines, the paper also finds that several previously unexamined implications of a convex flow-performance relation fail to hold. Moreover, convexity with fractional flows (which we confirm) largely disappears in a conditional analysis that controls for heterogeneity. Market shares offer an alternative specification for flow that is more resilient to heterogeneity. Using this alternative specification, we again find no evidence of convexity in the flow-performance relation. We conclude that the widely held belief that the flow response function is convex is due solely to misspecification of the empirical model. The flow-return relation is linear.

Suggested Citation

  • Spiegel, Matthew & Zhang, Hong, 2013. "Mutual fund risk and market share-adjusted fund flows," Journal of Financial Economics, Elsevier, vol. 108(2), pages 506-528.
  • Handle: RePEc:eee:jfinec:v:108:y:2013:i:2:p:506-528
    DOI: 10.1016/j.jfineco.2012.05.018
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    References listed on IDEAS

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    Cited by:

    1. Fabian Irek, & Jan Jaap Hazenberg & Willem van der Scheer & Mariela Stefanova, 2013. "The Lure of the Brand: Evidence from the European Mutual Fund Industry," LSF Research Working Paper Series 13-8, Luxembourg School of Finance, University of Luxembourg.
    2. repec:eee:jfinec:v:126:y:2017:i:3:p:592-613 is not listed on IDEAS
    3. Zeng, Yao, 2017. "A dynamic theory of mutual fund runs and liquidity management," ESRB Working Paper Series 42, European Systemic Risk Board.
    4. Clifford, Christopher P. & Jordan, Bradford D. & Riley, Timothy B., 2014. "Average funds versus average dollars: Implications for mutual fund research," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 249-260.
    5. Aramonte, Sirio & Lee, Seung Jung & Stebunovs, Viktors, 2015. "Risk Taking and Low Longer-term Interest Rates: Evidence from the U.S. Syndicated Loan Market," Finance and Economics Discussion Series 2015-68, Board of Governors of the Federal Reserve System (U.S.).
    6. Sylvain Bourjade & Crina Pungulescu & David Stolin, 2016. "Voting against absent directors," Economics Bulletin, AccessEcon, vol. 36(2), pages 901-912.
    7. repec:pal:assmgt:v:18:y:2017:i:6:d:10.1057_s41260-017-0047-6 is not listed on IDEAS
    8. Clemens Sialm & T. Mandy Tham, 2016. "Spillover Effects in Mutual Fund Companies," Management Science, INFORMS, vol. 62(5), pages 1472-1486, May.
    9. Cheng, Si & Massa, Massimo & Zhang, Hong, 2015. "Short-Sale Constraints and the Pricing of Managerial Skills," CEPR Discussion Papers 10447, C.E.P.R. Discussion Papers.
    10. Ha, Yeonjeong & Ko, Kwangsoo, 2017. "Why do fund managers increase risk?," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 108-116.
    11. Hu, May & Chao, Chi-Chur & Lim, Jin Hao, 2016. "Another explanation of the mutual fund fee puzzle," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 134-152.
    12. Paek, Miyoun & Ko, Kwangsoo, 2014. "Aggregate net flows, inflows, and outflows of equity funds: The U.S. versus Japan," Japan and the World Economy, Elsevier, vol. 32(C), pages 85-95.
    13. Li, Jennifer & Massa, Massimo & Zhang, Hong, 2016. "Culture vs. Bias: Can Social Trust Mitigate the Disposition Effect?," CEPR Discussion Papers 11474, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Mutual funds; Fund flows; Investment flows; Convexity; Market share;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G1 - Financial Economics - - General Financial Markets

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