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 language | English |
|---|---|
| Pages (from-to) | 585-603 |
| Number of pages | 19 |
| Journal | Journal of Financial and Quantitative Analysis |
| Volume | 46 |
| Issue number | 2 |
| DOIs | |
| State | Published - Dec 2010 |
| Externally published | Yes |
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.
| Funders | Funder number |
|---|---|
| Henry Crown Institute of Business Research in Israel | |
| Israel Science Foundation | 1314/08 |
| Tel Aviv University |