Abstract

http://ssrn.com/abstract=2263944
 


 



Fund Flows and Market States


Francesco A. Franzoni


Università della Svizzera italiana (University of Lugano); Swiss Finance Institute

Martin C. Schmalz


University of Michigan, Stephen M. Ross School of Business

June 14, 2016

Swiss Finance Institute Research Paper No. 13-41
Ross School of Business Paper No. 1194

Abstract:     
This paper establishes a new empirical fact: mutual funds' flow-performance sensitivity is a hump-shaped function of aggregate risk-factor realizations. We entertain different explanations for this finding, which receive varying degrees of empirical support. However, none of them provides a full account for the fact. We thus develop a simple theory that can account for the hump-shaped relation observed in the data. We assume rational investors are uncertain about the degree to which fund returns are exposed to systematic risk. Thus, fund performance is less informative
about manager skill when the realization of systematic risk is larger in absolute value. We provide empirical support for the out-of-sample prediction that the hump shape is more pronounced
for funds with more uncertain risk loadings.

Number of Pages in PDF File: 79

Keywords: Bayesian learning, parameter uncertainty, mutual funds, flow-performance, Kalman filter, beta

JEL Classification: G00, G20


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Date posted: May 13, 2013 ; Last revised: July 12, 2016

Suggested Citation

Franzoni, Francesco A. and Schmalz, Martin C., Fund Flows and Market States (June 14, 2016). Swiss Finance Institute Research Paper No. 13-41; Ross School of Business Paper No. 1194. Available at SSRN: http://ssrn.com/abstract=2263944 or http://dx.doi.org/10.2139/ssrn.2263944

Contact Information

Francesco A. Franzoni
Università della Svizzera italiana (University of Lugano) ( email )
Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute
Switzerland
Martin C. Schmalz (Contact Author)
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States
7347630304 (Phone)
HOME PAGE: http://https://sites.google.com/site/martincschmalz/
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