Economic Conditions, Flight-to-Quality and Mutual Fund Flow

44 Pages Posted: 26 Aug 2008 Last revised: 27 Jan 2013

See all articles by John Chalmers

John Chalmers

University of Oregon

Aditya Kaul

University of Alberta - Department of Finance and Statistical Analysis

Blake Phillips

University of Waterloo

Date Written: January 11, 2010

Abstract

We study the effects of economic conditions and destabilizing events on the aggregate asset allocations of mutual fund investors. In the universe of U.S. mutual funds between 1991 and 2008, we find that excess flow is consistently related to proxies for economic conditions. An expected improvement in economic conditions causes investors to direct flow away from relatively safe money market funds and towards riskier equity funds. Around major crises, we find evidence of flight-to-quality, that is, significant flow into money market funds and out of equity funds. The same patterns exist in the population of Canadian mutual funds. Flow for low fee or low turnover funds, likely to be held by sophisticated investors, shows a sharper reaction to economic conditions and crises. Consistent with these allocations being a response to economic conditions, we find that high money market flow is associated with high T-bill returns, and that this association weakens once we control for economic conditions. We estimate that investors with moderate to high levels of risk aversion receive higher utility by switching between money market and equity funds in anticipation of changes in economic conditions, relative to a buy-and-hold strategy in equities.

Keywords: Mutual funds, mutual fund flow, flight-to-quality, risk aversion

JEL Classification: G11, G14, G23, G32

Suggested Citation

Chalmers, John and Kaul, Aditya and Phillips, Blake, Economic Conditions, Flight-to-Quality and Mutual Fund Flow (January 11, 2010). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1258122 or http://dx.doi.org/10.2139/ssrn.1258122

John Chalmers

University of Oregon ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-3337 (Phone)

Aditya Kaul (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
403-492-5027 (Phone)
403-492-3325 (Fax)

Blake Phillips

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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