The Price Pressure of Aggregate Mutual Fund Flows
38 Pages Posted: 5 Nov 2008 Last revised: 7 Aug 2009
Date Written: July 30, 2008
Using a unique database of aggregate daily flows to equity mutual funds in Israel, we find strong support for the "temporary price pressure hypothesis" regarding mutual fund flows: Mutual fund flows create temporary price pressure that is subsequently corrected. We find that flows are positively auto-correlated, and are correlated with market returns (R2 of 20%). Our main finding is that approximately one-half of the price change is reversed within ten trading days. This support for the "temporary price pressure hypothesis" complements microstructure research concerning price impact and price noises in stocks by indicating price noise at the aggregate market level.
Keywords: mutual funds, flows, returns, price pressure, price impact
JEL Classification: G12, G14
Suggested Citation: Suggested Citation