Drivers of Flows-Performance Sensitivity in Mutual Funds

Noam Ben-Ze'ev ()
Additional contact information
Noam Ben-Ze'ev: Bank of Israel

No 2023.06, Bank of Israel Working Papers from Bank of Israel

Abstract: This paper examines the relationship between mutual fund performance and fund flows in Israel. Israel has a unique setting: Bonds are traded on a limit order book exchange, resulting in high liquidity. Using proprietary daily fund level data, I find a convex performance-flows relationship, meaning investors are more sensitive to good performance than to bad performance, in all three market segments of actively managed funds: government bonds, corporate bonds, and equity. This indicates that the first mover's advantage documented in US corporate bond mutual funds as a source of market fragility, which drives a concave performance-flows relationship, does not exist in Israel, and perhaps more generally in exchanges with a limit order book. I find that flows to passive funds are at minimum 40% less sensitive to performance in comparison to active funds, indicating that passive investments might have a moderating effect at times of financial stress, as flows to them are less procyclical than to active funds.

Keywords: Financial fragility; liquidity; bond funds; mutual fund flows; passive investment; index tracking funds (search for similar items in EconPapers)
JEL-codes: G01 G18 G20 G23 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2023-05
New Economics Papers: this item is included in nep-fmk and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2023.06.pdf First Version, 2023 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boi:wpaper:2023.06

Access Statistics for this paper

More papers in Bank of Israel Working Papers from Bank of Israel Contact information at EDIRC.
Bibliographic data for series maintained by Yossi Yakhin ().