Forecasting Crashes: Correlated Fund Flows and the Skewness in Stock Returns
38 Pages Posted: 18 Oct 2014
Date Written: October 17, 2014
This paper uses the correlation of money flow among mutual funds to forecast the skewness of stock returns. We show that asset returns are highly negatively skewed when their mutual fund owners experience correlated liquidity shocks. In addition, stocks with high mutual fund ownership are more “crash prone”, whereas the returns of stocks with concentrated ownership tend to display more positive skewness.
Keywords: skewness, mutual funds, capital flow
JEL Classification: G12, G17, G23, C58
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