The price pressure of aggregate mutual fund flows

Azi Ben-Rephael, Shmuel Kandel, Avi Wohl

Research output: Contribution to journalArticlepeer-review

73 Scopus citations

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.

Original languageEnglish
Pages (from-to)585-603
Number of pages19
JournalJournal of Financial and Quantitative Analysis
Volume46
Issue number2
DOIs
StatePublished - Dec 2010
Externally publishedYes

Bibliographical note

Funding Information:
∗Ben-Rephael, [email protected], Wohl, [email protected], Faculty of Management, Tel Aviv University, POB 39010, Tel Aviv 69978, Israel; Shmuel Kandel, Faculty of Management, Tel Aviv University, Wharton School, University of Pennsylvania, and CEPR, died on January 16, 2007, after a sudden illness. We thank the Tel Aviv Stock Exchange for providing us the mutual funds flows data. We thank Simon Benninga, Hendrik Bessembinder (the editor), Roger Edelen (the referee), Eugene Kandel, Saggi Katz, Sapir Forum participants, and seminar participants at the Bank of Israel for helpful comments and suggestions. This research was supported by the Israel Science Foundation (Grant No. 1314/08) and by the Sapir Forum. Ben-Rephael thanks the David Orgler and Family Research Fund for Banking and Finance for financial support. Wohl thanks the Henry Crown Institute of Business Research in Israel at Tel Aviv University for partial financial support. Ben-Rephael and Wohl dedicate this paper to the memory of Shmuel Kandel, a mentor and a friend.

Funding

∗Ben-Rephael, [email protected], Wohl, [email protected], Faculty of Management, Tel Aviv University, POB 39010, Tel Aviv 69978, Israel; Shmuel Kandel, Faculty of Management, Tel Aviv University, Wharton School, University of Pennsylvania, and CEPR, died on January 16, 2007, after a sudden illness. We thank the Tel Aviv Stock Exchange for providing us the mutual funds flows data. We thank Simon Benninga, Hendrik Bessembinder (the editor), Roger Edelen (the referee), Eugene Kandel, Saggi Katz, Sapir Forum participants, and seminar participants at the Bank of Israel for helpful comments and suggestions. This research was supported by the Israel Science Foundation (Grant No. 1314/08) and by the Sapir Forum. Ben-Rephael thanks the David Orgler and Family Research Fund for Banking and Finance for financial support. Wohl thanks the Henry Crown Institute of Business Research in Israel at Tel Aviv University for partial financial support. Ben-Rephael and Wohl dedicate this paper to the memory of Shmuel Kandel, a mentor and a friend.

FundersFunder number
Henry Crown Institute of Business Research in Israel
Israel Science Foundation1314/08
Tel Aviv University

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