Mutual Fund Flows, Monetary Policy and Financial Stability

58 Pages Posted: 6 Sep 2016

See all articles by Ayelen Banegas

Ayelen Banegas

Board of Governors of the Federal Reserve System

Gabriel Montes-Rojas

University of San Andres (UMSA)

Lucas Siga

New York University (NYU) - Abu Dhabi

Date Written: 2016-07-26

Abstract

We study the links between monetary policy and mutual fund flows, and the potential risks to financial stability that might arise from such flows, using data over the 2000-14 period. We find that monetary policy can have a direct influence on the allocation decisions of mutual fund investors. In particular, we show that monetary policy shocks explain mutual fund flow dynamics and that the effect of these shocks differs by investment strategy. Results suggest that positive shocks to the path of monetary policy (unexpected tightening) are associated with persistent outflows from bond mutual funds. Conversely, a tighter-than-expected monetary policy path will cause net inflows into equity funds. In an industry that "mutualizes" redemption costs and where many funds may engage in liquidity transformation, our flow-performance analysis provides evidence of the potential existence of a first-mover advantage in less liquid segments of the market.

Keywords: First-mover advantage, Monetary policy, Mutual fund flows

JEL Classification: G20, G23, E52

Suggested Citation

Banegas, Ayelen and Montes-Rojas, Gabriel and Siga, Lucas, Mutual Fund Flows, Monetary Policy and Financial Stability (2016-07-26). FEDS Working Paper No. 2016-071, Available at SSRN: https://ssrn.com/abstract=2834237 or http://dx.doi.org/10.17016/FEDS.2016.071

Ayelen Banegas (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Gabriel Montes-Rojas

University of San Andres (UMSA) ( email )

Vita Dumas 284
(1644) Victoria, Pcia
Buenos Aires, Buenos Aires 1644
Argentina

Lucas Siga

New York University (NYU) - Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

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