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Market Volatility and Mutual Fund Cash Flows

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  • Dengpan Luo

Abstract

This paper examines the relation between market volatility and monthly mutual fund cash flows. We find that bond fund investors in the period of 1984 through 1998 do not respond to past stock market volatility at the aggregate level after we take into account the persistency of volatility over time and the relation between risks and returns. On the other hand, stock fund investors respond negatively to concurrent and past long term (semi-annual and annual) market volatility. Stock fund investors' volatility timing behavior explains why fund managers decrease market exposure during periods of high market volatility. We also find that the negative relation between stock fund flows and market volatility is not entirely driven by the persistency of volatility over time or the relation between risks and returns. Using semi-variance of daily stock market returns, we find no evidence that investors are only concerned about downside volatility. Both upside volatility and downside volatility have negative impact on subsequent stock fund flows. We also find that stock fund flows in our sample period have strong positive impact on the subsequent market

Suggested Citation

  • Dengpan Luo, 2003. "Market Volatility and Mutual Fund Cash Flows," Yale School of Management Working Papers ysm395, Yale School of Management, revised 01 Sep 2003.
  • Handle: RePEc:ysm:somwrk:ysm395
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    File URL: http://icfpub.som.yale.edu/publications/2401
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    Cited by:

    1. Demirer, Rıza & Lee, Hsiang-Tai & Lien, Donald, 2015. "Does the stock market drive herd behavior in commodity futures markets?," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 32-44.
    2. repec:aio:manmar:v:xv:y:2017:i:2:p:59-69 is not listed on IDEAS

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