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Dynamics of Mutual Funds in Relation to Stock Market: A Vector Autoregressive Causality Analysis

Author

Listed:
  • Md. Shahadath Hossain

    (United International University, Bangladesh)

  • A.B.M. Munibur Rahman

    (School of Management, Wuhan University of Technology, China)

  • Md. Salah Uddin Rajib

    (School of Management, Wuhan University of Technology, China)

Abstract

In Bangladesh, primary and secondary mutual fund markets behave in a completely different way, where initial public offering (IPO) investors of mutual funds earn more than 250 percent rerun, whereas secondary market investors cannot even manage to cover the opportunity cost of their investment. There are few other abnormalities present in this market unlike everywhere in the world, most of the mutual funds are closed-end (92 percent) and closed-end mutual funds are barred to issue bonus or right shares. A total of 714 day's observations, from January 2008 to December 2010, of four variables DSE (Dhaka Stock Exchange) general index return, DSE general index turnover, mutual funds' return and mutual funds' turnover are utilized. Stationarity of the variables are tested with Augmented Dickey-Fuller (ADF) unit root test and found that variables are in different order of integration. Long-term equilibrium relationships among the variables are tested with Johansen cointegration and it is found that DSE general index return and mutual funds' return are cointegrated. Toda-Yamamoto (TY) version of granger non-causality test is employed and bidirectional causality is found moving from DSE (Dhaka Stock Exchange) general index turnover to DSE general index return, whereas unidirectional causality is found moving from mutual fund's return to DSE general index return, mutual funds' return to mutual funds turnover, and DSE general index turnover to mutual funds turnover. This finding helps to conclude that equity shares' demand drives the mutual funds demand but even higher demand of mutual funds fails to raise its own price unless underlying value of the mutual funds changes.

Suggested Citation

  • Md. Shahadath Hossain & A.B.M. Munibur Rahman & Md. Salah Uddin Rajib, 2013. "Dynamics of Mutual Funds in Relation to Stock Market: A Vector Autoregressive Causality Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 191-201.
  • Handle: RePEc:eco:journ1:2013-01-19
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    References listed on IDEAS

    as
    1. Miguel A. Ferreira & Aneel Keswani & António F. Miguel & Sofia B. Ramos, 2013. "The Determinants of Mutual Fund Performance: A Cross-Country Study," Review of Finance, European Finance Association, vol. 17(2), pages 483-525.
    2. Woodrow T. Johnson & James M. Poterba, 2008. "Taxes and Mutual Fund Inflows Around Distribution Dates," NBER Working Papers 13884, National Bureau of Economic Research, Inc.
    3. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-577, Sept.-Oct.
    4. Judith A. Giles & Sadaf Mirza, 1999. "Some Pretesting Issues on Testing for Granger Noncausality," Econometrics Working Papers 9914, Department of Economics, University of Victoria.
    5. Alexakis, Christos & Niarchos, Nikitas & Patra, Theopfano & Poshakwale, Sunil, 2005. "The dynamics between stock returns and mutual fund flows: empirical evidence from the Greek market," International Review of Financial Analysis, Elsevier, vol. 14(5), pages 559-569.
    6. Rakowski, David & Wang, Xiaoxin, 2009. "The dynamics of short-term mutual fund flows and returns: A time-series and cross-sectional investigation," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2102-2109, November.
    7. Joshua M. Pollet & Mungo Wilson, 2008. "How Does Size Affect Mutual Fund Behavior?," Journal of Finance, American Finance Association, vol. 63(6), pages 2941-2969, December.
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    Cited by:

    1. Sanjiwani Jayant KUMAR & Hitesh PUNJABI & Ashish MAHADIK, 2018. "Study of Relationship between Large-Cap Equity Funds Returns in India and Benchmark Returns," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 3, pages 47-56.

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    More about this item

    Keywords

    Mutual Fund; Dhaka Stock Exchange; Vector Auto Regressive; Augmented Dickey-Fuller; Cointegration; Stationarity;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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