40 Pages Posted: 10 Nov 2008
We study the dynamic relation between aggregate mutual fund flow and market-wide volatility. Using daily flow data and a VAR approach, we find that market volatility is negatively related to concurrent and lagged flow. A structural VAR impulse response analysis suggests that shock in flow has a negative impact on market volatility: An inflow (outflow) shock predicts a decline (an increase) in volatility. From the perspective of volatility-flow relation, we find evidence of volatility timing for recent period of 1998-2003. Finally, we document a differential impact of daily inflow versus outflow on intraday volatility. The relation between intraday volatility and inflow (outflow) becomes weaker (stronger) from morning to afternoon.
Keywords: Mutual fund flow, Market volatility, Volatility timing, Fund inflow and fund outflow
JEL Classification: G10, G11, G19
Suggested Citation: Suggested Citation
Cao, Charles and Chang, Eric C. and Wang, Ying, An Empirical Analysis of the Dynamic Relationship between Mutual Fund Flow and Market Return Volatility. Journal of Banking and Finance, Vol. 32, No. 10, pp. 2111-2123, 2008. Available at SSRN: https://ssrn.com/abstract=1297359