Mutual Fund Style Volatility and Fund Flows
57 Pages Posted: 10 Jan 2018
Date Written: December 14, 2018
Equity mutual funds often follow a flexible trading strategy that results in volatile investment style drifts over time. This paper empirically examines whether investors respond to such fund behavior. We estimate a significant positive relationship between levels of style volatility and subsequent flows into mutual funds. Further, this relationship is less pronounced for funds in low- or high-return groups. These findings, which we confirm through several robustness checks, support a direct mechanism rather than an omitted variable in relating the two variables of interest. Our results also reveal the power of style volatility in predicting fund flows.
Keywords: Mutual Fund Flow, Style Volatility, Investor Learning, Manager Behavior
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