Mutual Fund Flows and Fluctuations in Credit and Business Cycles
74 Pages Posted: 17 Aug 2016 Last revised: 14 Oct 2019
Date Written: October 9, 2019
Several measures of credit-market booms are known to precede downturns in real economic activity. We offer an early indicator for all known measures of credit booms. Our measure is based on intra-family flow shifts towards high-yield bond mutual funds. It predicts indicators such as growth in financial intermediary balance sheets, increase in shares of high-yield bond issuers, and downturns of various measures of credit spreads. It also directly predicts the business cycle by positively predicting GDP growth and negatively predicting unemployment. Our results provide support for the investor demand–based narrative of credit cycles and can be useful for policymakers.
Keywords: Credit Cycle, Business Cycle, Mutual Fund Flows, High-Yield Bonds, Investor Demand, Leading Indicator
JEL Classification: E32, G12
Suggested Citation: Suggested Citation