Fund Flows and Market States

Review of Financial Studies, 2017, DOI:10.1093/rfs/hhx015

82 Pages Posted: 13 May 2013 Last revised: 19 Jun 2017

See all articles by Francesco A. Franzoni

Francesco A. Franzoni

USI Lugano; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Martin C. Schmalz

University of Oxford - Finance; CEPR; CESifo; European Corporate Governance Institute (ECGI)

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). Review of Financial Studies, 2017, DOI:10.1093/rfs/hhx015. Available at SSRN: https://ssrn.com/abstract=2263944 or http://dx.doi.org/10.2139/ssrn.2263944

Francesco A. Franzoni

USI Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Martin C. Schmalz (Contact Author)

University of Oxford - Finance ( email )

United States

CEPR ( email )

London
United Kingdom

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
936
Abstract Views
4,604
rank
24,817
PlumX Metrics