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Stock Returns and Mutual Fund Flows in the Korean Financial Market: A System Approach

Author

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  • Jaebeom Kim

    (Department of Economics, Oklahoma State University)

  • Jung-Min Kim

    (University of Seoul)

Abstract

This paper investigates dynamic and causal relations between stock returns and mutual fund flows in Korea using a system method which utilizes information from the stock, bond, and money markets. For this purpose, we employ DSUR proposed by Mark, Ogaki, and Sul (2005), SURECM, and two causality tests by Granger (1969) and Sims (1972) in a system method to account for cross equation correlations among markets which have a close relationship with one another. Furthermore, we make use of information in the variance-covariance matrix of residual to improve the efficiency of the statistical estimates. The empirical evidence from the system method indicates that fund flows do not respond to eliminate the deviation from long-run equilibrium, and stock prices cause net fund flows in the Korean market, implying that investors move their money to the securities that yield higher returns to rebalance their investment portfolios in the short-run. Thus, our findings do not support the popular notion that considers mutual fund flows as a driving force behind rallies in Korean financial markets.

Suggested Citation

  • Jaebeom Kim & Jung-Min Kim, 2016. "Stock Returns and Mutual Fund Flows in the Korean Financial Market: A System Approach," Working Papers 2016-3, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1603
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    References listed on IDEAS

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    Cited by:

    1. Ros Zam Zam Sapian & Jing Quan Lee, 2018. "Return, Volatility and Equity Fund Flows Linkages: Evidence from an Emerging Market," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 8(7), pages 172-186, July.
    2. Yue Meinn GOH & Ros Zam Zam SAPIAN, 2017. "Return, Volatility And Fund Flows Linkages: Malaysian Evidence," Management and Marketing Journal, University of Craiova, Faculty of Economics and Business Administration, vol. 0(2), pages 59-69, November.

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    More about this item

    Keywords

    Stock returns; Mutual fund flows; Causality; Co-integration; DSUR; SURECM;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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