Measuring Mutual Fund Flow Pressure as Shock to Stock Returns
32 Pages Posted:
Date Written: September 12, 2018
Beginning with Edmans, Goldstein, and Jiang (2012), a large and rapidly growing literature has developed examining how mutual fund outflows generate downward price pressure which causes extreme declines in stock returns that are unrelated to fundamentals. In this paper, I demonstrate that this decline is actually mechanical, the result of inadvertently multiplying by a monotonic transformation of the quarterly stock return itself when measuring flow pressure. Once this direct measurement of returns is removed, extreme outflow pressure generates an effectively negligible quarterly decline in returns and demonstrates no subsequent reversal. I examine the consequences for several published results, and provide suggestions for future analysis.
Keywords: mutual funds, fire sales, behavioral finance, corporate policy, instrumental variables
JEL Classification: G23,G34,G31,G30,G14
Suggested Citation: Suggested Citation