Stock Returns and Mutual Fund Flows in the Korean Financial Market: A System Approach

29 Pages Posted: 24 Mar 2016

See all articles by Jaebeom Kim

Jaebeom Kim

Oklahoma State University - Stillwater

Jung-Min Kim

University of Seoul, College of Business Administration

Date Written: March 22, 2016

Abstract

This paper investigates dynamic and causal relations between stock returns and mutual fund flows in Korea using a system method which utilizes information from the stock, bond, and money markets. For this purpose, we employ DSUR proposed by Mark, Ogaki, and Sul (2005), SURECM, and two causality tests by Granger (1969) and Sims (1972) in a system method to account for cross equation correlations among markets which have a close relationship with one another. Furthermore, we make use of information in the variance-covariance matrix of residual to improve the efficiency of the statistical estimates. The empirical evidence from the system method indicates that fund flows do not respond to eliminate the deviation from long-run equilibrium, and stock prices cause net fund flows in the Korean market, implying that investors move their money to the securities that yield higher returns to rebalance their investment portfolios in the short-run. Thus, our findings do not support the popular notion that considers mutual fund flows as a driving force behind rallies in Korean financial markets.

Keywords: Stock returns, Mutual fund flows, Causality, Co-integration, DSUR, SURECM

JEL Classification: G11, C32

Suggested Citation

Kim, Jaebeom and Kim, Jung-Min, Stock Returns and Mutual Fund Flows in the Korean Financial Market: A System Approach (March 22, 2016). Bank of Korea WP 2016-3. Available at SSRN: https://ssrn.com/abstract=2752810 or http://dx.doi.org/10.2139/ssrn.2752810

Jaebeom Kim

Oklahoma State University - Stillwater ( email )

Stillwater, OK 74078-0555
United States

Jung-Min Kim (Contact Author)

University of Seoul, College of Business Administration ( email )

Seoul 02504
Korea, Republic of (South Korea)
+82-2-6490-2259 (Phone)

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