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Index Funds and Stock Market Growth

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Author Info
Massimo Massa () (Department of Finance)
William N. Goetzmann () (Yale University, School of Management)

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Abstract

Our analysis of daily index fund flows indicates a strong contemporaneous correlation between fund inflows and S&P market returns. We also document a strong negative correlation between fund out flows and S&P market returns with the exception of outflows from a back-end load fund. These effects may be interpreted in two ways. Either investor supply and demand affects S&P market prices, or investors condition their demand and supply on intra-day market fluctuations. To sort out these effects, we examine trailing investor reaction to market moves. Our results suggest the market reacts to daily demand. However, only negative reactions appear due to past returns. We investigate whether index investor demand shocks are permanent or temporary by examining the related behavior of the S&P futures index. Clear evidence supports the hypothesis that they are permanent. This result may help explain the unusual recent relative performance of the S&P 500 index. Using the average market-timing newsletter recommendation over the period, we find that investors appear to react to "expert" advice about the market. Bullish newsletter sentiment is associated with greater inflows, although outflows are not well explained by newsletter advice. Dispersion in advice is associated with lower inflows. We find a high correlation among a number of variables used as a proxy for investor disagreement.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm99.

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Date of creation: 20 Sep 1998
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Handle: RePEc:ysm:somwrk:ysm99

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Find related papers by JEL classification:
G2 - Financial Economics - - Financial Institutions and Services
G1 - Financial Economics - - General Financial Markets

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Lakonishok, Josef, et al, 1991. "Window Dressing by Pension Fund Managers," American Economic Review, American Economic Association, vol. 81(2), pages 227-31, May. [Downloadable!] (restricted)
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  2. Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June. [Downloadable!] (restricted)
    Other versions:
  4. George M. Constantinides & John B. Donaldson & Rajinish Mehra, . "Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle," University of California at Santa Barbara, Economics Working Paper Series 21-98, Department of Economics, UC Santa Barbara.
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  5. Warther, Vincent A., 1995. "Aggregate mutual fund flows and security returns," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 209-235. [Downloadable!] (restricted)
  6. Chordia, Tarun, 1996. "The structure of mutual fund charges," Journal of Financial Economics, Elsevier, vol. 41(1), pages 3-39, May. [Downloadable!] (restricted)
  7. Lynch, Anthony W & Mendenhall, Richard R, 1997. "New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index," Journal of Business, University of Chicago Press, vol. 70(3), pages 351-83, July. [Downloadable!] (restricted)
  8. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August. [Downloadable!] (restricted)
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  11. Josef Lakonishok & Andrei Shleifer & Robert W. Vishny, 1991. "Do Institutional Investors Destabilize Stock Prices? Evidence on Herding and Feedback Trading," NBER Working Papers 3846, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Bakshi, Gurdip S & Chen, Zhiwu, 1994. "Baby Boom, Population Aging, and Capital Markets," Journal of Business, University of Chicago Press, vol. 67(2), pages 165-202, April. [Downloadable!] (restricted)
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  14. Chan, Louis K. C. & Lakonishok, Josef, 1993. "Institutional trades and intraday stock price behavior," Journal of Financial Economics, Elsevier, vol. 33(2), pages 173-199, April. [Downloadable!] (restricted)
  15. Chan, Louis K C & Lakonishok, Josef, 1995. " The Behavior of Stock Prices around Institutional Trades," Journal of Finance, American Finance Association, vol. 50(4), pages 1147-74, September. [Downloadable!] (restricted)
  16. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-90, July. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stephen J. Brown & William N. Goetzmann & Takato Hiraki & Noriyoshi Shirishi & Masahiro Watanabe, 2003. "Investor Sentiment in Japanese and U.S. Daily Mutual Fund Flows," NBER Working Papers 9470, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Roger M. Edelen & Jerold B. Warner, . "Aggregate Prixe Effects of Institutional Trading: A Study of Mutual Fund Flow and Market Returns," Rodney L. White Center for Financial Research Working Papers 26-99, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
  3. Massa, Massimo & Peyer, Urs & Tong, Zhenxu, 2005. "Limits of Arbitrage and Corporate Financial Policy," CEPR Discussion Papers 4829, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Braverman, Oded & Kandel, Shmuel & Wohl, Avi, 2005. "The (Bad?) Timing of Mutual Fund Investors," CEPR Discussion Papers 5243, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Randall Morck & Fan Yang, 2001. "The Mysterious Growing Value of S&P 500 Membership," NBER Working Papers 8654, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Paul A. Gompers & Andrew Metrick, . "Institutional Investors and Equity Prices," Rodney L. White Center for Financial Research Working Papers 20-99, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
    Other versions:
  7. Julie Agnew, 2004. "An Analysis Of How Individuals React To Market Returns In One 401(k) Plan," Working Papers, Center for Retirement Research at Boston College 2004-13, Center for Retirement Research. [Downloadable!]
  8. Christian Pierdzioch & Andrea Schertler, 2007. "Sources of Predictability of European Stock Markets for High-technology Firms," European Journal of Finance, Taylor and Francis Journals, vol. 13(1), pages 1-27, January. [Downloadable!] (restricted)
  9. William N. Goetzmann & Massimo Massa, 2000. "Daily Momentum and Contrarian Behavior of Index Fund Investors," NBER Working Papers 7567, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Hau, Harald & Massa, Massimo & Peress, Joël, 2005. "Do Demand Curves for Currencies Slope Down? Evidence from the MSCI Global Index Change," CEPR Discussion Papers 4862, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. William N. Goetzmann & Massimo Massa, 2003. "Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias," NBER Working Papers 9499, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Hau, Harald, 2007. "A Generalized Portfolio Approach to Limited Risk Arbitrage: Evidence from the MSCI Global Index Change," CEPR Discussion Papers 6094, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. David Ling & Andy Naranjo, 2006. "Dedicated REIT Mutual Fund Flows and REIT Performance," The Journal of Real Estate Finance and Economics, Springer, vol. 32(4), pages 409-433, June. [Downloadable!] (restricted)
  14. David Ling & Gianluca Marcato & Patrick McAllister, 2008. "The Dynamics of Asset Prices and Transaction Activity in Illiquid Markets: The Case of Private Commercial Real Estate," Real Estate & Planning Working Papers rep-wp2008-11, Henley Business School, Reading University. [Downloadable!]
  15. John Gallo & Chanwit Phengpis & Peggy Swanson, 2007. "Determinants of Equity Style," Journal of Financial Services Research, Springer, vol. 31(1), pages 33-51, February. [Downloadable!] (restricted)
  16. Anthony Richards, 2004. "Big Fish in Small Ponds: The Trading Behaviour and Price Impact of Foreign Investors in Asian Emerging Equity Markets," RBA Research Discussion Papers rdp2004-05, Reserve Bank of Australia. [Downloadable!]
    Other versions:
  17. Nicholas Barberis & Andrei Shleifer & Jeffrey Wurgler, 2002. "Comovement," Harvard Institute of Economic Research Working Papers 1953, Harvard - Institute of Economic Research. [Downloadable!]
    Other versions:
    • Nicholas Barberis & Andrei Shleifer & Jeffrey Wurgler, 2002. "Comovement," NBER Working Papers 8895, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    • Barberis, Nicholas & Shleifer, Andrei & Wurgler, Jeffrey, 2005. "Comovement," Journal of Financial Economics, Elsevier, vol. 75(2), pages 283-317, February. [Downloadable!] (restricted)
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