An empirical analysis of the dynamic relationship between mutual fund flow and market return volatility

Charles Cao, Eric C. Chang and Ying Wang

Journal of Banking & Finance, 2008, vol. 32, issue 10, 2111-2123

Abstract: We study the dynamic relation between aggregate mutual fund flow and market-wide volatility. Using daily flow data and a VAR approach, we find that market volatility is negatively related to concurrent and lagged flow. A structural VAR impulse response analysis suggests that shock in flow has a negative impact on market volatility: An inflow (outflow) shock predicts a decline (an increase) in volatility. From the perspective of volatility-flow relation, we find evidence of volatility timing for recent period of 1998-2003. Finally, we document a differential impact of daily inflow versus outflow on intraday volatility. The relation between intraday volatility and inflow (outflow) becomes weaker (stronger) from morning to afternoon.

Keywords: Mutual; fund; flow; Market; volatility; Volatility; timing; Fund; inflow; and; fund; outflow (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (50)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:32:y:2008:i:10:p:2111-2123

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