Measuring Mutual Fund Flow Pressure as Shock to Stock Returns

32 Pages Posted:  

Malcolm Wardlaw

University of Michigan, Stephen M. Ross School of Business; University of Texas - Dallas

Date Written: September 12, 2018

Abstract

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

Wardlaw, Malcolm, Measuring Mutual Fund Flow Pressure as Shock to Stock Returns (September 12, 2018). Available at SSRN: https://ssrn.com/abstract=3248750

Malcolm Wardlaw (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

University of Texas - Dallas ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States
972-883-5903 (Phone)

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