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

Charles Cao; Eric C. Chang; Ying Wang

doi:10.1016/j.jbankfin.2007.12.035

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

Charles Cao, Eric C. Chang, Ying Wang

Finance

Research output: Contribution to journal › Article › peer-review

72 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 language	English (US)
Pages (from-to)	2111-2123
Number of pages	13
Journal	Journal of Banking and Finance
Volume	32
Issue number	10
DOIs	https://doi.org/10.1016/j.jbankfin.2007.12.035
State	Published - Oct 2008

All Science Journal Classification (ASJC) codes

Finance
Economics and Econometrics

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10.1016/j.jbankfin.2007.12.035

Cite this

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title = "An empirical analysis of the dynamic relationship between mutual fund flow and market return volatility",

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.",

author = "Charles Cao and Chang, \{Eric C.\} and Ying Wang",

note = "Funding Information: This research is supported by the Research Grant Council of the Hong Kong Government (Earmarked Grant: HKU7141/02H). Special thanks go to Giorgio Szego and two anonymous referees for insights that greatly improved the quality of our paper. We thank Herman Bierens, Tim Simin, Michelle Lowry, Laura Field, Bill Kracaw and seminar participants at Pennsylvania State University and Financial Management Association Meetings for helpful comments.",

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AU - Cao, Charles

AU - Chang, Eric C.

AU - Wang, Ying

N1 - Funding Information: This research is supported by the Research Grant Council of the Hong Kong Government (Earmarked Grant: HKU7141/02H). Special thanks go to Giorgio Szego and two anonymous referees for insights that greatly improved the quality of our paper. We thank Herman Bierens, Tim Simin, Michelle Lowry, Laura Field, Bill Kracaw and seminar participants at Pennsylvania State University and Financial Management Association Meetings for helpful comments.

PY - 2008/10

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N2 - 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.

AB - 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.

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JO - Journal of Banking and Finance

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ER -

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

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