The Impact of Stock Market Volatility Expectations on Investor Behavior: Evidence From Aggregate Mutual Fund Flows
39 Pages Posted: 9 Mar 2011
Date Written: February 1, 2011
We find that aggregate net equity fund flows are strongly negatively correlated with changes in expected future stock market volatility as measured by the VIX. Implying that investor purchase decisions are primarily driven by returns and sale decisions by risk perceptions, we further find that changes in the VIX primarily impact aggregate equity mutual fund redemptions with little impact on inflows while stock market returns impact inflows but not outflows. We also find that changes in the VIX are positively correlated with the degree of portfolio rebalancing. While the impact on outflows is much larger, both fund inflows and outflows tend to increase (decrease) when the VIX increases (decreases). Aside from possibly the change in civilian employment, we find no evidence that macroeconomic variables and consumer sentiment have an independent impact on mutual fund flows after controlling for the VIX and stock market returns.
Keywords: mutual funds, VIX, implied volatility, portfolio choice
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation