Are Bond Mutual Fund Flows Destabilizing? Examining the Evidence from the 'Taper Tantrum'

47 Pages Posted: 18 Oct 2014 Last revised: 14 Nov 2014

See all articles by Sean Collins

Sean Collins

Investment Company Institute - Research

Chris Plantier

Wells Fargo, N.A.

Date Written: September 1, 2014

Abstract

The notion that outflows from long-term mutual funds might destabilize financial markets is an old one, dating back to the late 1920s. The hypothesis, which has resurfaced periodically, has three components. First, because of an initial shock to financial markets, fund investors redeem heavily. Second, to meet redemptions, fund portfolio managers sell fund securities. Third, sales of fund securities put additional downward pressure on stock or bond prices. As this paper discusses, there has historically been little evidence supporting this hypothesis. Outflows from equity and bond funds have remained muted in the face of large economic shocks. Also, academic work has had difficulty finding evidence that outflows from funds add downward pressure to market prices. Since the financial crisis of 2007-2009, interest in the destabilizing-fund flows hypothesis has been renewed because of large inflows into bond funds, concerns that long-term interest rates could rise sharply as the Federal Reserve ends quantitative easing, and the development of theoretical models predicting that long-term fund flows could be destabilizing because of a “first-mover” advantage. This paper examines the evidence that outflows from bond fund flows could be destabilizing, focusing on the so-called “taper tantrum” period, the summer of 2013. Using descriptive analysis and vector autoregressions, we find there is at best very weak, if any, statistical evidence that bond fund flows have been destabilizing. Our findings are consistent with much of the literature, which has found that aggregate fund flows respond to market returns (often with a lag), but that there is not much evidence of a feedback effect from aggregate fund flows to market returns.

Suggested Citation

Collins, Sean S. and Plantier, L. Christopher, Are Bond Mutual Fund Flows Destabilizing? Examining the Evidence from the 'Taper Tantrum' (September 1, 2014). Available at SSRN: https://ssrn.com/abstract=2510666 or http://dx.doi.org/10.2139/ssrn.2510666

Sean S. Collins

Investment Company Institute - Research ( email )

202-326-5882 (Phone)

L. Christopher Plantier (Contact Author)

Wells Fargo, N.A. ( email )

1750 H. Street, NW
Washington, DC 20006
United States
2024162619 (Phone)

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