An empirical analysis of the dynamic relationship between mutual fund flow and market return volatility

Charles Cao, Eric C. Chang, Ying Wang

Research output: Contribution to journalArticle

34 Scopus citations

Abstract

We study the dynamic relation between aggregate mutual fund flow and market-wide volatility. Using daily flow data and a VAR approach, we find that market volatility is negatively related to concurrent and lagged flow. A structural VAR impulse response analysis suggests that shock in flow has a negative impact on market volatility: An inflow (outflow) shock predicts a decline (an increase) in volatility. From the perspective of volatility-flow relation, we find evidence of volatility timing for recent period of 1998-2003. Finally, we document a differential impact of daily inflow versus outflow on intraday volatility. The relation between intraday volatility and inflow (outflow) becomes weaker (stronger) from morning to afternoon.

Original languageEnglish (US)
Pages (from-to)2111-2123
Number of pages13
JournalJournal of Banking and Finance
Volume32
Issue number10
DOIs
StatePublished - Oct 1 2008

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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