Fund Flows and Market States

Francesco Franzoni and Martin Schmalz

The Review of Financial Studies, 2017, vol. 30, issue 8, 2621-2673

Abstract: This paper establishes a new empirical fact: Mutual funds’ flow-performance sensitivity is a hump-shaped function of aggregate risk-factor realizations. Explanations based on extant theories can explain only a fraction of the pattern. We thus develop a new parsimonious model. It assumes Bayesian investors who are uncertain about the degree to which fund returns are exposed to systematic risk. Fund performance is then less informative about manager skill when factor realizations are larger in absolute value. The data also support the out-of-sample prediction that the hump shape is more pronounced for funds with more uncertain risk loadings.Received October 24, 2014; editorial decision October 11, 2016 by Editor Itay Goldstein.

JEL-codes: G01 G23 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (36)

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The Review of Financial Studies is currently edited by Itay Goldstein

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