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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Investor Preferences and Mutual Fund Flows |
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| Language |
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| Institution | University of Zurich |
| Faculty | Faculty of Economics, Business Administration and Information Technology |
| Number of Pages | 50 |
| Date | 2015 |
| Zusammenfassung | The academic literature on mutual fund flows shows that there is a positive association between flows and returns. Warther (1995) studies aggregate fund flows and finds that there is a positive relation between aggregate flows of mutual funds and contemporaneous stock market returns. Ippolito (1992) and Sirri and Tufano (1998) study mutual fund flows across individual funds. Their main finding is that there is a strong relation between mutual fund flows and past performance. Moreover they show that there is non-linearity in the performance-flow relation that is the relation is stronger for funds with positive rather than negative returns. This master thesis aims to verifying the hypothesis that equity fund flows react strongly to past performance by analyzing individual equity mutual funds. A broad data set with equity mutual funds from countries around the world is collected. Time series analysis between fund flows and returns is performed and equity fund flows are regressed on past fund flows and returns. The results show that there is indeed a strong positive relation between mutual fund performance and subsequent fund flows. Also it is shown that fund flows are significantly correlated with past fund flows. Furthermore, the thesis examines the association between aggregate equity fund flows and stock market returns. For the analysis of the aggregate equity fund flows, equity funds are aggregated across countries according to the funds’ region of sale. The empirical results provide evidence that aggregate equity fund flows and stock market returns are positively associated across the sample countries. This implies that positive stock market returns are very likely to be accompanied by positive fund flows and vice versa. Furthermore, the thesis examines whether any additional factors affect the association between aggregate equity mutual fund flows and stock market returns. Cross sectional analysis is performed so that the hypothesis that rationale behavior can lead to the association between aggregate equity fund flows and market returns or irrational or behavioral factors are the reason for this observed phenomenon is examined. More specifically the association between aggregate fund flows and stock market returns is analyzed by considering cross-country differences in investors’ time and risk preferences and in macroeconomic and financial development factors. Investors’ behavior may explain the differences in aggregate equity fund flows across countries. A cross-sectional analysis of the association between aggregate equity fund flows and stock market returns by taking into account investors’ time and risk preferences is performed and shows that the behavioral factor of loss aversion has explanatory power on this association. It is shown that in countries with a higher degree of loss aversion investors are more likely to buy equity funds when the stock market experiences gains and sell them when the stock market experiences losses. Furthermore, it is shown that investors’ behavior may be able to explain the cross-country differences in the volatility of the aggregate equity fund flows. The behavioral factor of patience is found to have a significant negative effect on the volatility of the flows. This implies that less patient investors are more prone to trade impulsively in and out of equity mutual funds and thus flows will be more volatile in less patient countries. Furthermore, the effect of financial development factors together with behavioral factors on aggregate equity fund flows is examined. The cross sectional analysis provides evidence that more financially developed countries will have lower flows, that is, less inflows and more outflows compared to those of less financially developed countries. This can be explained by the fact that the mutual fund industry is expected to experience lower growth in more financially developed countries and thus the probability for fund inflows is lower in those countries. Additionally it is shown that in countries with more financially developed markets aggregate equity fund flows will be less volatile. This might be due to the fact that investors from such countries are more experienced and sophisticated and thus do not suffer from irrational trading behaviors. Finally, differences in the macroeconomic development levels of countries are shown to be able to explain the cross-country differences in the volatility of the aggregate equity fund flows. Specifically, the level of GDP per capita, which is used as a macroeconomic development measure, has a significant and negative effect on the volatility of the flows. This implies that investors from countries with lower GDP per capita trade in and out of equity mutual funds more often. |
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