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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Mutual Fund Flows, Monetary Policy and Financial Stability
Banegas, Ayelen
Montes-Rojas, Gabriel
Siga, Lucas
Abstract

We study the links between monetary policy and mutual fund flows, and the potential risks to financial stability that might arise from such flows, using data over the 2000-14 period. We find that monetary policy can have a direct influence on the allocation decisions of mutual fund investors. In particular, we show that monetary policy shocks explain mutual fund flow dynamics and that the effect of these shocks differs by investment strategy. Results suggest that positive shocks to the path of monetary policy (unexpected tightening) are associated with persistent outflows from bond mutual funds. Conversely, a tighter-than-expected monetary policy path will cause net inflows into equity funds. In an industry that "mutualizes" redemption costs and where many funds may engage in liquidity transformation, our flow-performance analysis provides evidence of the potential existence of a first-mover advantage in less liquid segments of the market.


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Banegas, Ayelen & Montes-Rojas, Gabriel & Siga, Lucas, Mutual Fund Flows, Monetary Policy and Financial Stability, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2016-071, 26 Jul 2016.
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Keywords: First-mover advantage ; Monetary policy ; Mutual fund flows
DOI: 10.17016/FEDS.2016.071
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