Network Externalities in Mutual Funds

49 Pages Posted: 6 Dec 2011 Last revised: 17 Mar 2016

See all articles by Jesse Blocher

Jesse Blocher

Vanderbilt University - Finance

Date Written: February 2, 2016


Existing literature on mutual fund flows documents surprisingly large return effects given that mutual fund flows are uninformed (i.e. not related to fundamentals). I provide evidence that network externalities generate the necessary amplification mechanism to support these results. Network externalities are generated by mutual funds with common holdings and return-chasing investors. Economically, I show that the fund flow network externality is 32-92% as large as the typical explanatory effects (e.g., lagged flows). Network externalities generate a 1.5% quarterly excess return that reverses in the subsequent year, and are independent of style investing and robust to multiple specifications of holdings similarity.

Keywords: Mutual Funds, Hedge Funds, Networks, Externalities

JEL Classification: G23, G14

Suggested Citation

Blocher, Jesse, Network Externalities in Mutual Funds (February 2, 2016). Journal of Financial Markets, 2016; Vanderbilt Owen Graduate School of Management Research Paper No. 1968488. Available at SSRN: or

Jesse Blocher (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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