Mutual fund flows and returns dynamics: Investor preferences and performance persistence

Giuseppe Galloppo, Roberto Guida and Viktoriia Paimanova

Research in International Business and Finance, 2024, vol. 71, issue C

Abstract: We investigate the flow-performance relationship by the lens of the investor preferences, applying a mutual fund dataset with an investment objective focused over European and US area. Incorporating a novel measure of asset managers’ market timing ability, we analyze the role played by performance persistence in mutual fund investing decisions by focusing on top performers in a short-time window. Our empirical results showed that preferences strongly influence the returns-flow dynamics when accounting for the asset type, geographical investment focus, and management style tilt, shedding new light on the behavior of certain clustered groups of investors. Furthermore, we find a long-run information effect as a proxy of a positive association between past returns and flows leading by the smart money effect. Surprisingly, we also observe irrational investors’ behavior when chasing for negative performers, likely due to a herding effect or flow persistent hypothesis as a result of the mechanisms of market allocation efficiency, which is likely to be affected by a slowdown functioning in the short-term phase. Robustness analyses confirm overall results.

Keywords: Mutual fund multifactor model; Market persistence; Investor preferences; Time dependency effect (search for similar items in EconPapers)
JEL-codes: G11 G12 G18 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:71:y:2024:i:c:s0275531924002782

DOI: 10.1016/j.ribaf.2024.102485

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