Fund flows and market states

Schmalz, Martin C. (2017) Fund flows and market states. Review of Financial Studies, 30 (8). pp. 2621-2673.


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 explain only 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.

Item Type: Article
Keywords: G01 - Financial Crises G23 - Non-bank Financial Institutions; Financial Instruments; Institutional Investors; finance
Subject(s): Finance
Date Deposited: 13 Dec 2018 15:57
Last Modified: 13 Dec 2018 15:57
Funders: n/a

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