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An Empirical Analysis of the Dynamic Relationship between Mutual Fund Flow and Market Return Volatility

40 Pages Posted: 10 Nov 2008  

Charles Cao

Pennsylvania State University

Eric C. Chang

University of Hong Kong - School of Business

Ying Wang

State University of New York at Albany - School of Business

Abstract

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

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

Charles Cao

Pennsylvania State University ( email )

Department of Finance
Smeal College of Business
University Park, PA 16802
United States
814-865-7891 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://www.personal.psu.edu/qxc2/cao.html

Eric Chieh C. Chang

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Ying Wang (Contact Author)

State University of New York at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

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