Fund Flows and Market States

82 Pages Posted: 13 May 2013 Last revised: 19 Nov 2016

Francesco A. Franzoni

Università della Svizzera italiana (USI), Lugano; Swiss Finance Institute

Martin C. Schmalz

University of Michigan, Stephen M. Ross School of Business

Date Written: October 6, 2016

Abstract

This paper establishes a new empirical fact: mutual funds' flow-performance sensitivity is a hump-shaped function of aggregate risk-factor realizations. Explanations based on extant theories can only explain a fraction of the pattern. We thus develop a new parsimonious model. It assumes Bayesian investors who are uncertain about the degree to which fund returns are exposed to systematic risk. Fund performance is then less informative about manager skill when factor realizations are larger in absolute value. The data also support the out-of-sample prediction that the hump shape is more pronounced for funds with more uncertain risk loadings.

Keywords: Bayesian learning, parameter uncertainty, mutual funds, flow-performance, Kalman filter, beta

JEL Classification: G00, G20

Suggested Citation

Franzoni, Francesco A. and Schmalz, Martin C., Fund Flows and Market States (October 6, 2016). Swiss Finance Institute Research Paper No. 13-41; Ross School of Business Paper No. 1194. Available at SSRN: https://ssrn.com/abstract=2263944 or http://dx.doi.org/10.2139/ssrn.2263944

Francesco A. Franzoni

Università della Svizzera italiana (USI), Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute

Switzerland

Martin C. Schmalz (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States
7347630304 (Phone)

HOME PAGE: http://https://sites.google.com/site/martincschmalz/

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