Mutual Fund Flow-Performance Relationship Under Volatile Market Condition
40 Pages Posted: 26 Jan 2013
Date Written: January 25, 2013
We analyze the relationship between flows and performance of Chinese mutual funds that trade in a volatile market environment. Consistent with existing literature, we find that the net flow to a fund is positively related to past fund performance. Contrary to previous studies using samples in the U.S. and other countries, our results do not exhibit an asymmetric flow-performance relationship, nor do we find any significant star effect in China. These results imply that market volatility plays an important role in reducing the asymmetric flow-performance relationship. Furthermore, we find that the positive relationship is more pronounced during bull markets than during bear markets. This suggests that Chinese mutual fund investors are more confident and invest more aggressively when stock markets perform well.
Keywords: Chinese mutual funds, Flow-performance relationship, Asymmetric relationship, Disposition effect, House money effect, Star effect, Cognitive dissonance, Attribution bias, Overconfidence
JEL Classification: G14
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