Volatile Market Condition and Investor Clientele Effects on Mutual Fund Flow Performance Relationship

Pacific-Basin Finance Journal, Vol. 29, Pp. 310-334, 2014

Posted: 13 Jul 2016

See all articles by Jun Xiao

Jun Xiao

Jiangxi University of Finance and Economics

Mingsheng Li

Bowling Green State University - College of Business Administration

Jing Shi

Macquarie University

Date Written: 2014

Abstract

We analyze mutual fund flow-performance relationship using a novel sample of Chinese mutual funds that trade in a volatile market environment. Consistent with existing literature, we find that the net flow to a fund is positively related to past fund performance. However, the positive flow-performance relationship weakens when the stock market is divided into high and low volatile periods or when funds are divided into good and poor performers. Contrary to previous studies using samples in U.S. and other countries, our results do not exhibit an asymmetric flow-performance relationship, nor do we find any significant Morningstar rating effect or smart money effect. Furthermore, we find that the overall stock market performance is the primary driving force of flow-performance relationship and the positive relationship is more pronounced in bull markets. Consistent with Thaler and Johnson’s (1990) house money effect and the overconfidence hypothesis proposed by Gervais and Odean (2001), this suggests that Chinese mutual fund investors are vulnerable to market conditions. The overall results imply that market conditions and investor clientele differences play an important role in fund investments and flow-performance relationships.

Keywords: Chinese Mutual Funds; Flow-Performance Relationship; Asymmetric Relationship; Disposition Effect; House Money Effect; Star Effect; Cognitive Dissonance; Attribution Bias; Overconfidence; Smart Money Effect; Investor Clientele

JEL Classification: G14

Suggested Citation

Xiao, Jun and Li, Mingsheng and Shi, Jing, Volatile Market Condition and Investor Clientele Effects on Mutual Fund Flow Performance Relationship (2014). Pacific-Basin Finance Journal, Vol. 29, Pp. 310-334, 2014. Available at SSRN: https://ssrn.com/abstract=2808544

Jun Xiao

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Mingsheng Li (Contact Author)

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Jing Shi

Macquarie University ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
Australia

HOME PAGE: http://https://researchers.mq.edu.au/en/persons/jing-shi

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