The Effects of Monetary Policy Shocks on Mutual Fund Investing

47 Pages Posted: 24 Jan 2021

See all articles by Ayelen Banegas

Ayelen Banegas

Board of Governors of the Federal Reserve System

Gabriel Montes-Rojas

University of Buenos Aires (UBA) - Universidad de Buenos Aires

Lucas Siga

New York University (NYU) - Abu Dhabi

Date Written: June 19, 2020

Abstract

We study the effects of unexpected changes in the stance of monetary policy on mutual fund performance and allocation decisions over the recent period of unconventional U.S. monetary policy. Taking an agnostic approach on the transmission mechanism of monetary policy on mutual fund investing, we find that monetary policy shocks have a direct effect on fund performance and flow dynamics, and that the effect of these surprises differs by investment strategy. The results show that an unexpected tightening of the stance of policy is associated with negative performance and outflows from bond funds, in particular those investing in government, investment grade, and international bonds. Results also point to a negative relationship between equity fund performance and policy tightening. Moreover, Federal Reserve’s balance sheet policy (i.e. large-scale asset purchases) have a strong positive effect on equity fund returns, especially on those investing in emerging markets.

Keywords: Mutual fund performance and flows, monetary policy shocks

JEL Classification: G20, G23, E52

Suggested Citation

Banegas, Ayelen and Montes-Rojas, Gabriel and Siga, Lucas, The Effects of Monetary Policy Shocks on Mutual Fund Investing (June 19, 2020). Available at SSRN: https://ssrn.com/abstract=3740019 or http://dx.doi.org/10.2139/ssrn.3740019

Ayelen Banegas (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Gabriel Montes-Rojas

University of Buenos Aires (UBA) - Universidad de Buenos Aires ( email )

Argentina

HOME PAGE: http://gabrielmontes.com.ar

Lucas Siga

New York University (NYU) - Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

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