Mutual Fund Cash Flows and Stock Market Performance

1914 Words Dec 11th, 2008 8 Pages
Mutual Fund Cash Flows and Stock Market Performance*

During the decade of the 1990’s through the year 2001 there were some major shifts in the deployment of investment assets. Based on a variety of measures, mutual funds grew dramatically as vehicles for investing in portfolios of stock. Specifically net cash flows into equity funds grew from $13 billion in 1990 to $310 billion in the year 2000.1 During that same period the number of equity funds rose from 1,100 to 4,395, while the number of accounts in those funds increased from 22 million to 162 million. The cumulative effect of the new money injected into equity funds, together with reinvestment of dividends, plus the attendant stock price appreciation has produced a phenomenal
…show more content…
The second explanatory variable in our study (M2) was the monthly growth rate of the M2 money supply. This variable may be viewed as a measure of the change in national monetary liquidity. Money supply growth also influences the stock market through its impact on general business conditions and economic activity. The third flow related variable, monthly changes in the federal funds rate (FF), provides information on the Federal Reserve’s efforts to stimulate or dampen the future growth of financial liquidity. Both fixed-income and equity markets pay close attention to Federal Reserve efforts to encourage or restrict economic growth through interest rate changes.
The final variable was an index of corporate profit growth (EPS). Earnings per share on the S&P 500 index was available on a quarterly basis, and using interpolation, monthly estimates of earnings were obtained. The growth rate of the estimated monthly earnings was calculated as the percentage change from the same calendar month of the prior year. In essence we applied the same type of comparisons used when companies contrast their most recent quarterly results to the same quarter of the previous year. This also has the effect of reducing problems associated with seasonal variations.2
Empirical Findings

Results of the analysis are presented in Equation (1) with the t-statistics shown in parentheses. The three flow-related variables (MF, M2, FF) were all
Open Document