The Flow-Performance Relationship Around the World
58 Pages Posted: 22 Mar 2009 Last revised: 21 Sep 2010
Date Written: September 17, 2010
We use a new dataset to study how mutual fund flows depend on past performance across 28 countries. We find that flows are convex with past performance, creating an incentive for managers to take excessive risk. The flow-performance convexity is less pronounced in countries with higher levels of economic, financial, and mutual fund industry development. This is because mutual fund investors in developed countries are more sophisticated and face lower costs of participating in the mutual fund industry. Higher country-level convexity is positively associated with higher levels of risk taking by fund managers.
Keywords: Mutual funds, Flow-performance relationship, Mutual fund flows, Convexity
JEL Classification: G15, G23
Suggested Citation: Suggested Citation