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Stock returns, mutual fund flows and spillover shocks

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  • Narayan, Paresh Kumar
  • Narayan, Seema
  • K.P, Prabheesh

Abstract

In this paper we examine the dynamic relationship between stock returns and mutual fund flows in India by using a generalised VAR model. We find that spillover shocks—that is, stock return shocks and mutual fund flow shocks together explain as much as 20% of the total forecast error variance of stock returns and mutual fund flows. We create a spillover index of shocks emanating from stock returns and mutual fund flows and tests whether it can actually predict stock returns and mutual fund flows. We find it does. Using the spillover index, we forecast stock returns and mutual fund flows, devise trading strategies for a mean–variance investor, and demonstrate the economic significance of the spillover index.

Suggested Citation

  • Narayan, Paresh Kumar & Narayan, Seema & K.P, Prabheesh, 2014. "Stock returns, mutual fund flows and spillover shocks," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 146-162.
    • Handle: RePEc:eee:pacfin:v:29:y:2014:i:c:p:146-162
    DOI: 10.1016/j.pacfin.2014.03.007
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    References listed on IDEAS

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    1. Francis X. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, January.
    2. Joakim Westerlund & Paresh Narayan, 2015. "Testing for Predictability in Conditionally Heteroskedastic Stock Returns," Journal of Financial Econometrics, Oxford University Press, vol. 13(2), pages 342-375.
    3. Narayan, Paresh Kumar & Narayan, Seema & Sharma, Susan Sunila, 2013. "An analysis of commodity markets: What gain for investors?," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3878-3889.
    4. Westerlund, Joakim & Narayan, Paresh Kumar, 2012. "Does the choice of estimator matter when forecasting returns?," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2632-2640.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Stock returns; Mutual fund flows; Spillover; Financial crisis; VAR model;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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