The (Bad?) Timing of Mutual Fund Investors
This paper provides a new look at the timing of mutual fund investors. We re-examine the relationship between investors' aggregate net flows into and out of the funds and the returns of the funds in subsequent periods. The negative relationship that we find (using monthly data of aggregate US equity mutual funds in the years 1984-2003 and a statistical test based on bootstrapping of returns) causes mutual fund investors, as a group, to realize a lower long-term accumulated return than the long-term accumulated return on a 'buy and hold' position in these funds. The 'bad' performance of mutual fund investors can be explained either by 'behavioural explanations' such as investor sentiment or by 'rational market explanations' that are based on time-varying risk premiums. We present a simple overlapping-generation model which predicts a negative relationship between flows and subsequent returns. It is assumed that flows into and out of funds are not related to information about future cash flows (dividends), but are caused by changes in other factors affecting the demand for stocks. Hence, a positive (negative) net flow in a given month implies a positive (negative) price change in the same month, but also lower (higher) expected future returns. We show that in each month the change in the expected future returns may be small (relative to the return variance), but the accumulated effect of these changes may be significant. This result may explain why previous studies, using monthly data of flows and returns in either simple regression models or VAR, could not have significantly detected the monthly change in the expected future returns even in a 15-year sample.
|Date of creation:||Sep 2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Franklin Edwards & Xin Zhang, 1998. "Mutual Funds and Stock and Bond Market Stability," Journal of Financial Services Research, Springer, vol. 13(3), pages 257-282, June.
- Massimo Massa & William N. Goetzmann, 1999.
"Index Funds and Stock Market Growth,"
Yale School of Management Working Papers
ysm23, Yale School of Management.
- Massimo Massa & William N. Goetzmann, 1998. "Index Funds and Stock Market Growth," Yale School of Management Working Papers ysm99, Yale School of Management.
- William N. Goetzmann & Massimo Massa, 1999. "Index Funds and Stock Market Growth," NBER Working Papers 7033, National Bureau of Economic Research, Inc.
- Campbell, John, 2000.
"Asset Pricing at the Millennium,"
3294737, Harvard University Department of Economics.
- John Y. Campbell, 2000. "Asset Pricing at the Millennium," Harvard Institute of Economic Research Working Papers 1897, Harvard - Institute of Economic Research.
- John Y. Campbell, 2000. "Asset Pricing at the Millennium," NBER Working Papers 7589, National Bureau of Economic Research, Inc.
- Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990.
"Noise Trader Risk in Financial Markets,"
3725552, Harvard University Department of Economics.
- Franklin Fant, L., 1999. "Investment behavior of mutual fund shareholders: The evidence from aggregate fund flows," Journal of Financial Markets, Elsevier, vol. 2(4), pages 391-402, November.
- Santini, Donald L. & Aber, Jack W., 1998. "Determinants of net new money flows to the equity mutual fund industry," Journal of Economics and Business, Elsevier, vol. 50(5), pages 419-429, September.
- Frazzini, Andrea & Lamont, Owen A., 2008.
"Dumb money: Mutual fund flows and the cross-section of stock returns,"
Journal of Financial Economics,
Elsevier, vol. 88(2), pages 299-322, May.
- Andrea Frazzini & Owen A. Lamont, 2005. "Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns," NBER Working Papers 11526, National Bureau of Economic Research, Inc.
- Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
- Geert Bekaert & Campbell R. Harvey & Robin L. Lumsdaine, 1999.
"The Dynamics of Emerging Market Equity Flows,"
NBER Working Papers
7219, National Bureau of Economic Research, Inc.
- Mosebach, Michael & Najand, Mohammad, 1999. "Are the Structural Changes in Mutual Funds Investing Driving the U.S. Stock Market to Its Current Levels?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(3), pages 317-29, Fall.
- Warther, Vincent A., 1995. "Aggregate mutual fund flows and security returns," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 209-235.
- Grinblatt, Mark & Keloharju, Matti, 2000. "The investment behavior and performance of various investor types: a study of Finland's unique data set," Journal of Financial Economics, Elsevier, vol. 55(1), pages 43-67, January.
- Edelen, Roger M. & Warner, Jerold B., 2001. "Aggregate price effects of institutional trading: a study of mutual fund flow and market returns," Journal of Financial Economics, Elsevier, vol. 59(2), pages 195-220, February.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:5243. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.