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The Price Pressure of Aggregate Mutual Fund Flows

Published online by Cambridge University Press:  23 December 2010

Azi Ben-Rephael ,
Shmuel Kandel  and
Avi Wohl
Azi Ben-Rephael
Affiliation:
Faculty of Management, Tel Aviv University, POB 39010, Tel Aviv 69978, Israel. azibenr@post.tau.ac.il
Shmuel Kandel
Affiliation:
Faculty of Management, Tel Aviv University, Wharton School, University of Pennsylvania, and CEPR.
Avi Wohl
Affiliation:
Faculty of Management, Tel Aviv University, POB 39010, Tel Aviv 69978, Israel. aviwohl@post.tau.ac.il
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Abstract

Using a unique database of aggregate daily flows to equity mutual funds in Israel, we find strong support for the “temporary price pressure hypothesis” regarding mutual fund flows: Mutual fund flows create temporary price pressure that is subsequently corrected. We find that flows are positively autocorrelated, and are correlated with market returns (R2 of 20%). Our main finding is that approximately one-half of the price change is reversed within 10 trading days. This support for the “temporary price pressure hypothesis” complements microstructure research concerning price impact and price noise in stocks by indicating price noise at the aggregate market level.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 2 , April 2011 , pp. 585 - 603
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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