Network externalities in mutual funds

Jesse Blocher

Journal of Financial Markets, 2016, vol. 30, issue C, 1-26

Abstract: The literature on mutual fund flows documents surprisingly large return effects given that mutual fund flows are uninformed (i.e., not related to fundamentals). I provide evidence that network externalities generate the necessary amplification mechanism to support these results. Network externalities are generated by mutual funds with common holdings and return-chasing investors. Economically, I show that the fund flow network externality is 32–92% as large as the typical explanatory effects (e.g., lagged flows). Network externalities generate a 1.5% quarterly excess return that reverses in the subsequent year, and are independent of style investing and robust to multiple specifications of holdings similarity.

JEL-codes: G14 G23 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:30:y:2016:i:c:p:1-26

DOI: 10.1016/j.finmar.2016.04.001

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