A Self-Exciting Model for Mutual Fund Flows: Investor Behaviour and Liability Risk

Posted: 1 Jun 2018

See all articles by Serge Darolles

Serge Darolles

Université Paris Dauphine - DRM-CEREG

Gaëlle Le Fol

Université Paris-Dauphine, PSL Research University, CNRS, UMR 7088, DRM, Finance, 75016 Paris, France; National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

Yang Lu

University of Paris 13

Theo Ran Sun

Université Paris-Dauphine, PSL Research University

Date Written: June 1, 2018

Abstract

This paper analyses the purchase and redemption behaviour of mutual fund investors and its implications on fund liquidity risk. We collect a novel set of proprietary data which contains a large number of French investors holding funds with various degrees of asset liquidity. We build a Self-Exciting Poisson model capturing fund flows' clustering effects and over-dispersion. The model improves the forecast accuracy of future flows and provides a reliable risk indicator (Flow Value at Risk.) Accordingly, we introduce the notion of liability risk where investor's behaviour increases mutual fund liquidity risk. We further decompose fund flows into investor categories. We find that investors exhibit high heterogeneous behaviour, and a lead-lag relation exists between them. Finally, we control flow dynamics for various economic conditions. We show that although flows evolve with economic conditions, investor's behaviour stays the main significant determinant of flows' randomness. Our findings encourage fund manager to adopt an ALM approach.

Keywords: Financial Econometrics, Hedge Funds/Mutual Funds, Market Microstructure/Liquidity.

JEL Classification: C55, C58, G11, G23

Suggested Citation

Darolles, Serge and Le Fol, Gaëlle and Lu, Yang and Sun, Ran, A Self-Exciting Model for Mutual Fund Flows: Investor Behaviour and Liability Risk (June 1, 2018). Paris December 2018 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=3188734

Serge Darolles

Université Paris Dauphine - DRM-CEREG ( email )

place du Maréchal de Lattre de Tassigny
cedex 16
Paris, 75775
France

Gaëlle Le Fol (Contact Author)

Université Paris-Dauphine, PSL Research University, CNRS, UMR 7088, DRM, Finance, 75016 Paris, France ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Yang Lu

University of Paris 13 ( email )

99 avenue Jean-Baptiste Clément
Villetaneuse, 93430
France

HOME PAGE: http://sites.google.com/site/luyangensae/home/research

Ran Sun

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
Paris, 75016
France

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