Why are Mutual Fund Flow and Market Returns Related? Evidence from High-Frequency Data

39 Pages Posted: 3 Apr 1999

See all articles by Roger M. Edelen

Roger M. Edelen

Virginia Tech

Jerold B. Warner

University of Rochester – Simon Business School

Abstract

We study the relation between market returns and unexpected aggregate flow into U.S. equity funds, using semi-weekly and daily flow data. The reaction of flow and return --whether it be one reacting to the other, or both reacting to a third factor -- is fast and strong. The flow-return relation is mainly concurrent, but flow also follows returns with a one-day lag. The lagged response of flow indicates either a common response of both returns and flow to new information, or positive feedback trading. Additional tests suggest that the concurrent relation reflects flow driving returns.

JEL Classification: G12

Suggested Citation

Edelen, Roger M. and Warner, Jerold B., Why are Mutual Fund Flow and Market Returns Related? Evidence from High-Frequency Data. Available at SSRN: https://ssrn.com/abstract=155431 or http://dx.doi.org/10.2139/ssrn.155431

Roger M. Edelen (Contact Author)

Virginia Tech ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

Jerold B. Warner

University of Rochester – Simon Business School ( email )

Carol Simon Hall 3-160H
Rochester, NY 14627
United States
585-275-2678 (Phone)
585-442-6323 (Fax)

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