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Is the flow-performance relationship really convex? - The impact of data treatment and model specification

Author

Listed:
  • Alexander Schiller

    (University of Regensburg)

  • René-Ojas Woltering

    (HES-SO University of Applied Sciences and Arts Western Switzerland)

  • Steffen Sebastian

    (University of Regensburg)

Abstract

This paper challenges the convexity of the flow-performance relationship, according to which investors strongly chase top-performing funds, while fund flows exhibit little to no sensitivity to past performance within the segment of poorly performing funds. Our results suggest that the flow-performance relationship is not convex, but rather linear. In contrast to prior studies, we use reported (i.e., exact) instead of approximated fund flow data, we trim (instead of winsorize) outliers, and we account for persistence in fund flows. We find that each factor contributes to serious biases. For example, investor reactions to poor performance only appear insignificant when outliers are winsorized instead of trimmed. And it is even more evident that fund investors flee poorly performing funds when the model incorporates lagged flows to account for fund flow persistence. Furthermore, our results provide evidence that the degree to which investors chase top-performing funds appears to be slightly upward biased if approximated fund flows are used. Our findings have important implications for the potential moral hazard of fund managers.

Suggested Citation

  • Alexander Schiller & René-Ojas Woltering & Steffen Sebastian, 2020. "Is the flow-performance relationship really convex? - The impact of data treatment and model specification," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(2), pages 300-320, April.
    • Handle: RePEc:spr:jecfin:v:44:y:2020:i:2:d:10.1007_s12197-019-09489-1
    DOI: 10.1007/s12197-019-09489-1
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Klinkowska, Olga & Zhao, Yuan, 2023. "Fund flows and performance: New evidence from retail and institutional SRI mutual funds," International Review of Financial Analysis, Elsevier, vol. 87(C).

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    More about this item

    Keywords

    Mutual funds; Fund flows; Flow-performance relationship;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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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