Fund Flows and Market States

Francesco A. Franzoni and Martin C. Schmalz
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Francesco A. Franzoni: USI Lugano; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)
Martin C. Schmalz: University of Oxford - Finance; CEPR; CESifo; European Corporate Governance Institute (ECGI)

No 13-41, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper establishes a new empirical fact: mutual funds' flow-performance sensitivity is a hump-shaped function of aggregate risk-factor realizations. Explanations based on extant theories can only explain a fraction of the pattern. We thus develop a new parsimonious model. It assumes Bayesian investors who are uncertain about the degree to which fund returns are exposed to systematic risk. Fund performance is then less informative about manager skill when factor realizations are larger in absolute value. The data also support the out-of-sample prediction that the hump shape is more pronounced for funds with more uncertain risk loadings.

Keywords: Bayesian learning; parameter uncertainty; mutual funds; flow-performance; Kalman filter; beta (search for similar items in EconPapers)
JEL-codes: G00 G20 (search for similar items in EconPapers)
Pages: 82 pages
Date: 2013-05, Revised 2017-06
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Citations: View citations in EconPapers (36)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1341

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