Mutual Fund Flows and the Information Channel of the Risk-free Rate
51 Pages Posted: 28 Jun 2019 Last revised: 9 Aug 2019
Date Written: August 7, 2019
I establish that US domestic equity mutual fund flows depend less on past fund returns when the risk-free rate declines. I demonstrate through a model of portfolio allocation with endogenous information that this novel finding is consistent with more privately informed fund investors when rates fall. To further validate this claim, I test the model's cross-sectional prediction that the weakening of the flow-performance relationship is more pronounced when information barriers are higher. Finally, as more direct evidence for this up-to-now overlooked information channel, I obtain that there are more page visits to online fund filings when interest rates are low.
Keywords: Flow-performance relationship of mutual funds, Asset allocation, Interest rates, Costly private information acquisition, Learning of mutual fund investors
JEL Classification: D82, D83, E44, G11, G23
Suggested Citation: Suggested Citation