Is fund performance driven by flows into connected funds? spillover effects in the mutual fund industry

Bing Zhu () and René-Ojas Woltering ()
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Bing Zhu: Technical University of Munich
René-Ojas Woltering: HES-SO University of Applied Sciences and Arts Western Switzerland

Journal of Economics and Finance, 2021, vol. 45, issue 3, No 9, 544-571

Abstract: Abstract Mutual funds are connected with each other through overlapping portfolio holdings. We document that the performance of individual mutual funds is affected by spillover effects from fund flows to connected mutual funds. Spillover-effects are particularly pronounced during crisis periods, when a one standard deviation increase in flows to the tercile of funds with the highest overlapping portfolio holdings is associated with a monthly excess returns of 1.50%. Small cap stock funds are more heavily impacted, suggesting that the spillover effect is related to underlying asset liquidity. Moreover, we shed light on the dark side of diversification, as highly diversified funds are more exposed to the spillover risk factor.

Keywords: Fund Flows; Price Pressure; Spillover Effects (search for similar items in EconPapers)
JEL-codes: G11 G14 G24 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s12197-021-09539-7

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