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Fund Flows and Market States

Author

Listed:
  • Francesco A. Franzoni

    (USI Lugano; Swiss Finance Institute; Centre for Economic Policy Research (CEPR))

  • Martin C. Schmalz

    (University of Oxford - Finance; CEPR; CESifo; European Corporate Governance Institute (ECGI))

Abstract

This paper establishes a new empirical fact: mutual funds' flow-performance sensitivity is a hump-shaped function of aggregate risk-factor realizations. Explanations based on extant theories can only explain a fraction of the pattern. We thus develop a new parsimonious model. It assumes Bayesian investors who are uncertain about the degree to which fund returns are exposed to systematic risk. Fund performance is then less informative about manager skill when factor realizations are larger in absolute value. The data also support the out-of-sample prediction that the hump shape is more pronounced for funds with more uncertain risk loadings.

Suggested Citation

  • Francesco A. Franzoni & Martin C. Schmalz, 2013. "Fund Flows and Market States," Swiss Finance Institute Research Paper Series 13-41, Swiss Finance Institute, revised Jun 2017.
    • Handle: RePEc:chf:rpseri:rp1341
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263944
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    More about this item

    Keywords

    Bayesian learning; parameter uncertainty; mutual funds; flow-performance; Kalman filter; beta;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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