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Mutual Fund Flows

Paper Session

Saturday, Jan. 7, 2023 2:30 PM - 4:30 PM (CST)

Sheraton New Orleans, Maurepas
Hosted By: American Finance Association
  • Chair: Clemens Sialm, University of Texas-Austin

Mutual Fund Flows and the Supply of Capital in Municipal Financing

Manuel Adelino
,
Duke University
Sophia Chiyoung Cheong
,
City University of Hong Kong
Jaewon Choi
,
University of Illinois-Urbana-Champaign
Ji Yeol Jimmy Oh
,
Hanyang University

Abstract

This paper traces the effects of shocks to the supply of capital from mutual funds on municipal bond financing to make three contributions to the literature. First, we deploy a novel identification strategy based on the Morningstar rating methodology at the moment that funds reach 5 years in operation. This approach isolates supply-side effects that are orthogonal to both fund and issuer fundamentals and applies in a broad range of settings. Second, we show that exogeneous fund flows lead to more municipal bond issuances and raise bond prices, but only when funds, issuers, and underwriters are connected through existing relationships. This result highlights a novel role for relationship lending in the context of municipal bond financing. Third, our results suggest that municipal bond issuers exploit favorable financing conditions to issue bonds with shorter delays and lower transaction costs, such as non-general-obligation bonds that require no voter approval and non-green bonds. These frictions can limit the impact of capital-supply shocks on municipal financing.

Economic Policy Uncertainty and Global Portfolio Allocations

Shashwat Alok
,
Indian School of Business
Apoorva Javadekar
,
Indian School of Business
Nitin Kumar
,
Indian School of Business
Russell Wermers
,
University of Maryland

Abstract

We examine how global institutional funds respond to news-based economic policy uncertainty (EPU) in their investment destinations. We document several novel findings. On average, we find a negative
flow-EPU relationship for global funds. There is significant variation in fund response to EPU, conditional on the characteristics of the investment destination. Consistent with "flight to safety", funds increase their investment flows into "safe-haven" countries in response to a rise in EPU in these nations. We also find weak evidence of "home bias" in fund response. The negative flow-EPU relationship is weaker for destination countries that share cultural, legal, and geopolitical similarities with the home country of funds. The relationship is also weaker for countries that are more informationally transparent and
rank higher in legal protection and democratic quality. Finally, we document a novel trans-
mission channel of economic policy uncertainty-related shocks through the portfolio response
of global funds. Global funds withdraw capital from an investment destination in response
to increased EPU exposure through other investment countries in their portfolio. Overall,
ours is the first study to shed light on the importance of EPU for the equity allocations of
global funds across countries.

Flow Diversification

Sunil Wahal
,
Arizona State University
Albert Wang
,
Auburn University

Abstract

We document large variation in the cross-sectional correlation and imbalance of daily mutual fund flows from share classes catering to retail investors, retirement accounts, and financial advisors. Funds with more diversified flows on day t face lower immediacy requirements and outperform funds with less diversified flows over the following three days. These return differences are independent of the magnitude of net flows, and present across all funds, not just those that invest in illiquid assets. The benefits of flow diversification are especially large during unanticipated common shocks. Flow diversification can mitigate liquidity externalities.

Who Creates and Who Bears Flow Externalities in Mutual Funds?

Daniel Fricke
,
Deutsche Bundesbank
Stephan Jank
,
Deutsche Bundesbank
Hannes Wilke
,
Deutsche Bundesbank

Abstract

Using a unique dataset on the sectoral ownership structure of euro area equity mutual funds, we study how different investor groups contribute to the negative performance externality from large outflows. Investment funds, as holders of mutual funds, are the main contributors to the flow externality. Insurers and households, in particular less financially-sophisticated ones, are the main receivers. These differences are due to investment funds reacting more strongly on past fund performance and displaying a more pro-cyclical investment behavior compared to households and insurers. Our results raise concerns regarding consumer protection and financial stability due to the trading activity of short-term oriented investors.

Discussant(s)
Daniel Bergstresser
,
Brandeis University
Zheng Sun
,
University of California-Irvine
Sergey Chernenko
,
Purdue University
Mariassunta Giannetti
,
Stockholm School of Economics
JEL Classifications
  • G1 - Asset Markets and Pricing