The Impact of Stock Market Volatility Expectations on Investor Behavior: Evidence From Aggregate Mutual Fund Flows

39 Pages Posted: 9 Mar 2011

See all articles by Louis H. Ederington

Louis H. Ederington

University of Oklahoma - Division of Finance

Evgenia V. Golubeva

University of Oklahoma - Division of Finance

Date Written: February 1, 2011

Abstract

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

Ederington, Louis H. and Golubeva, Evgenia V., The Impact of Stock Market Volatility Expectations on Investor Behavior: Evidence From Aggregate Mutual Fund Flows (February 1, 2011). Available at SSRN: https://ssrn.com/abstract=1782009 or http://dx.doi.org/10.2139/ssrn.1782009

Louis H. Ederington (Contact Author)

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States
405-325-5591 (Phone)
405-325-7688 (Fax)

Evgenia V. Golubeva

University of Oklahoma - Division of Finance ( email )

307 West Brooks
Room 205A, Adams Hall
Norman, OK 73019
United States
405-325-7727 (Phone)
405-325-7688 (Fax)

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