Far tail or extreme day returns, mutual fund cash flows and investment behaviour

David Burnie and Adri De Ridder

Applied Financial Economics, 2010, vol. 20, issue 16, 1241-1256

Abstract: This study examines the frequency of extreme trading days and investment behaviour in Sweden. We show that the frequency, as well as the magnitude of extreme trading days has increased over time. We also show that the frequency of extreme trading days in a year is positively correlated to the frequency the preceding year and that this behaviour has persisted from 1940 to 2006. Furthermore, we show that aggregate cash flows into equity and bond funds are unrelated to risk measured by SD of return. Our findings show that investors, individuals as well as corporations, use simple passive investment strategies and hence do not believe in market timing or wish to risk capital on capturing far tail or black swan-type returns.

Date: 2010
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DOI: 10.1080/09603107.2010.489885

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