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Is fund performance driven by flows into connected funds? spillover effects in the mutual fund industry

Author

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  • Bing Zhu

    (Technical University of Munich)

  • René-Ojas Woltering

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

Abstract

Mutual funds are connected with each other through overlapping portfolio holdings. We document that the performance of individual mutual funds is affected by spillover effects from fund flows to connected mutual funds. Spillover-effects are particularly pronounced during crisis periods, when a one standard deviation increase in flows to the tercile of funds with the highest overlapping portfolio holdings is associated with a monthly excess returns of 1.50%. Small cap stock funds are more heavily impacted, suggesting that the spillover effect is related to underlying asset liquidity. Moreover, we shed light on the dark side of diversification, as highly diversified funds are more exposed to the spillover risk factor.

Suggested Citation

  • Bing Zhu & René-Ojas Woltering, 2021. "Is fund performance driven by flows into connected funds? spillover effects in the mutual fund industry," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 45(3), pages 544-571, July.
    • Handle: RePEc:spr:jecfin:v:45:y:2021:i:3:d:10.1007_s12197-021-09539-7
    DOI: 10.1007/s12197-021-09539-7
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    More about this item

    Keywords

    Fund Flows; Price Pressure; Spillover Effects;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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