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Forecasting Crashes: Correlated Fund Flows and Skewness in Stock Returns

Author

Listed:
  • Xun Gong
  • Chunmei Lin
  • Remco C. J. Zwinkels

Abstract

This article uses the correlation of money flow among mutual funds to forecast the skewness of stock returns. We develop the Flow Driven Skewness measure and show that it is significantly related to future skewness of stock returns. Stocks with higher correlation between their mutual fund owners’ money flow are therefore more “crash prone.” The relation between Flow Driven Skewness and future firm-level skewness is especially important for the largest and the smallest firms in the sample, and remains true for all levels of skewness. The findings are robust to alternative drivers of skewness in stock returns, as well as the choice of calculation, empirical methodology, and sample period.

Suggested Citation

  • Xun Gong & Chunmei Lin & Remco C. J. Zwinkels, 2017. "Forecasting Crashes: Correlated Fund Flows and Skewness in Stock Returns," Journal of Financial Econometrics, Oxford University Press, vol. 15(1), pages 36-61.
    • Handle: RePEc:oup:jfinec:v:15:y:2017:i:1:p:36-61.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbw009
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    References listed on IDEAS

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    More about this item

    Keywords

    capital flow; mutual funds; ownership structure; skewness;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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