Behavioral Factors in Mutual Fund Flows

42 Pages Posted: 2 Mar 2000  

Massimo Massa

INSEAD - Finance

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance

Date Written: December 1999

Abstract

Using a sample of daily net flows to nearly 1,000 U.S. mutual funds over a year and a half period, we identify a set of systematic factors that explain a significant amount of the variation in flows. This suggests the existence of a common component to mutual fund investor behavior and indicates which asset classes may be regarded as economic substitutes by the participants in the market for mutual fund shares. We find that flows into equity funds -- both domestic and international -- are negatively correlated to flows to money market funds and precious metals funds. This suggests that investor rebalancing between cash and equity explains a significant amount of trade in mutual fund shares. The negative correlation of equities to metals suggests that this timing is not simply due to liquidity concerns, but rather to sentiment about the equity premium.

We address the question of whether behavioral factors spread returns by using the mutual fund flow factors as pre-specified regressors in a Fama-MacBeth asset pricing framework. We find that the factors derived from flows alone explain as much as 45% of the cross-sectional variation in mutual fund returns. The fund flow factors provide significant incremental explanatory power in the cross-sectional regressions on daily returns.

We consider a number of alternatives to explain our evidence including causality from returns to flows and vice-versa. Our evidence is consistent with the existence of a pervasive investor sentiment variable.

JEL Classification: G1, G2

Suggested Citation

Massa, Massimo and Goetzmann, William N. and Rouwenhorst, K. Geert, Behavioral Factors in Mutual Fund Flows (December 1999). Yale ICF Working Paper No. 00-14. Available at SSRN: https://ssrn.com/abstract=201035 or http://dx.doi.org/10.2139/ssrn.201035

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

William N. Goetzmann (Contact Author)

Yale School of Management - International Center for Finance ( email )

165 Whitney Ave.
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5950 (Phone)
203-436-9252 (Fax)

HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)

Paper statistics

Downloads
6,504
Rank
661
Abstract Views
23,862