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Mutual fund flow-driven trading and the mispricing of cross-listed stocks

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  • Rakowski, David
  • Diltz, J. David
  • Nguyen, Anh Tuan

Abstract

We explore cross-border divergence in pricing of cross-listed stocks driven by mutual fund flow–driven trading. Drawing on data from the US and forty-four international markets, we find the following: 1) Non-US stock returns are highly correlated with US stock returns and only weakly associated with liquidity-driven US-based mutual fund trading; 2) Approximately 69 % of the variation in non-US stock returns may be attributed to flow-driven trading, controlling for a variety of factors; 3) Stock return divergence is greater for small-cap, narrowly-held, and actively traded stocks; 4) Divergence is greater for stocks cross-listed in Latin American, Caribbean, and Asian-Pacific emerging markets; 5) Divergence is greater for stocks in funds experiencing outflows; and finally 6) Large outflows (i.e., fire sales) have no effect on price divergence across markets.

Suggested Citation

  • Rakowski, David & Diltz, J. David & Nguyen, Anh Tuan, 2024. "Mutual fund flow-driven trading and the mispricing of cross-listed stocks," Journal of Multinational Financial Management, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:mulfin:v:76:y:2024:i:c:s1042444x24000537
    DOI: 10.1016/j.mulfin.2024.100888
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