Mutual fund flows and fire sale risk

September 10, 2016

A new empirical paper looks at the drivers of U.S. mutual funds flows across asset classes. An important finding is that changes of monetary policy expectations towards tightening trigger net outflows from bond funds and net inflows into equity funds. Typically, the costs of redemptions are borne by investors that do not redeem or redeem late. This creates incentives for fire sales and causes of price distortions, particularly if the outlook for monetary policy is revised significantly.

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Trend chasing and overreaction in equity and bond markets

July 18, 2015

Empirical analysis suggests that equity and bond returns in international markets are driven mostly by shocks to expected future real cash flows. Moreover, they interact with mutual fund flows. In particular, there is evidence of short-term “trend chasing” and overreaction. Bond market returns and flows are also jointly driven by U.S. interest rate shocks.

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