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Measuring Investor Sentiment with Mutual Fund Flows

59 Pages Posted: 14 Sep 2008 Last revised: 21 Sep 2011

Azi Ben-Rephael

Indiana University - Kelley School of Business - Department of Finance

Shmuel Kandel (deceased)

Deceased

Avi Wohl

Tel Aviv University - Coller School of Management

Date Written: September 12, 2011

Abstract

We investigate a proxy for monthly shifts between bond funds and equity funds in the USA: aggregate net exchanges of equity funds. This measure (which is negatively related to changes in VIX) is positively contemporaneously correlated with aggregate stock market excess returns: One standard deviation of net exchanges is related to 1.95% of market excess return. Our main new finding is that 85% (all) of the contemporaneous relation is reversed within four (ten) months. The effect is stronger in smaller stocks and in growth stocks. These findings support the notion of "noise" in aggregate market prices induced by investor sentiment.

Keywords: mutual funds, flows, investor sentiment, return predictability, stocks

JEL Classification: G11, G12, G14

Suggested Citation

Ben-Rephael, Azi and Kandel (deceased), Shmuel and Wohl, Avi, Measuring Investor Sentiment with Mutual Fund Flows (September 12, 2011). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1267284

Azi Ben-Rephael

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

HOME PAGE: http://www.kelley.iu.edu/finance/

Avi Wohl (Contact Author)

Tel Aviv University - Coller School of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 6409051 (Phone)

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