Where Does Money Flow? A Tale of Two Manager Abilities and The Role of Market Volatility

68 Pages Posted: 27 Apr 2022 Last revised: 14 Jun 2022

See all articles by Bing Han

Bing Han

University of Toronto, Rotman School of Management

Yangyi Liu

Southwestern University of Finance and Economics (SWUFE) - School of Finance

Ronghua Luo

Southwestern University of Finance and Economics (SWUFE)

Date Written: April 15, 2022

Abstract

This paper documents that investors differentiate mutual funds’ stock selection and market timing abilities. Moreover, market volatility has an opposite impact on investors’ responses to the two kinds of abilities. With an increase in market volatility, there are more inflows to funds with stock selection ability and fewer inflows to funds with market timing ability. Our empirical results are robust and cannot be explained by known determinants of mutual fund flow, including Morningstar ratings and several behavioral biases. We show that the findings are consistent with the prediction of a Bayesian learning model. All else equal, investors expect a lower probability of a fund possessing market timing ability while market volatility is high because the value added by the market timing ability increases with market volatility.

Keywords: Fund manager abilities, Market volatility, Fund flows, Investor sophistication

JEL Classification: G11, G23

Suggested Citation

Han, Bing and Liu, Yangyi and Luo, Ronghua, Where Does Money Flow? A Tale of Two Manager Abilities and The Role of Market Volatility (April 15, 2022). Available at SSRN: https://ssrn.com/abstract=4037042 or http://dx.doi.org/10.2139/ssrn.4037042

Bing Han

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

Yangyi Liu (Contact Author)

Southwestern University of Finance and Economics (SWUFE) - School of Finance ( email )

Chengdu, 610074
China

Ronghua Luo

Southwestern University of Finance and Economics (SWUFE) ( email )

Zhizhi Zone 236, 555 Liutai Avenue
Wenjiang District
Chengdu, Sichuan 611130
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
49
Abstract Views
186
PlumX Metrics