Mutual fund flow-driven trading and the mispricing of cross-listed stocks

David Rakowski, J. David Diltz and Anh Tuan Nguyen

Journal of Multinational Financial Management, 2024, vol. 76, issue C

Abstract: We explore cross-border divergence in pricing of cross-listed stocks driven by mutual fund flow–driven trading. Drawing on data from the US and forty-four international markets, we find the following: 1) Non-US stock returns are highly correlated with US stock returns and only weakly associated with liquidity-driven US-based mutual fund trading; 2) Approximately 69 % of the variation in non-US stock returns may be attributed to flow-driven trading, controlling for a variety of factors; 3) Stock return divergence is greater for small-cap, narrowly-held, and actively traded stocks; 4) Divergence is greater for stocks cross-listed in Latin American, Caribbean, and Asian-Pacific emerging markets; 5) Divergence is greater for stocks in funds experiencing outflows; and finally 6) Large outflows (i.e., fire sales) have no effect on price divergence across markets.

Keywords: Mutual fund flows; Price pressure; Fire sales; Cross-listing; Cross-border arbitrage; Spillovers (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:76:y:2024:i:c:s1042444x24000537

DOI: 10.1016/j.mulfin.2024.100888

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