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Inflation and equity mutual fund flows

Srinivasan Krishnamurthy, Denis Pelletier and Richard S. Warr

Journal of Financial Markets, 2018, vol. 37, issue C, 52-69

Abstract: We document a negative relation between inflation and aggregate equity mutual fund flows and hypothesize that this relation is partly due to inflation illusion on the part of investors. Inflation illusion occurs when investors fail to incorporate the effect of inflation into their estimates of nominal growth rates. Consequently, they lower their estimates of the intrinsic values of stocks and move their assets away from equities. Our results are robust to controls for alternative explanations such as inflation proxying for poorer future real cash flow growth and periods of higher inflation being associated with higher equity risk premia.

Keywords: Mutual funds; Fund flows; Inflation illusion; Equity valuation (search for similar items in EconPapers)
JEL-codes: E21 G11 G23 (search for similar items in EconPapers)
Date: 2018
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