Mutual Fund Flows, Expected Returns, and the Real Economy
Posted: 5 Dec 2010 Last revised: 11 Jun 2014
Date Written: August 17, 2011
Abstract
This paper investigates the relation between mutual fund flows and the real economy.The findings of this paper support the theory that the positive co-movement of flows into equity funds and stock market returns is explained by a common response to macroeconomic news.Variables that predict the real economy as well as the equity premium - in particular dividend-price ratio, default spread, relative T-Bill rate and consumption-wealth ratio - are related to fund flows and can account for the correlation of flows and market returns. Furthermore, consistent with the information-response hypothesis, mutual fund flows are forward-looking and predict real economic activity.
Keywords: Aggregate Mutual Fund Flows, Equity Premium, Return Predictability, Asset Pricing
JEL Classification: G12, G14
Suggested Citation: Suggested Citation