Investor sentiment, mutual fund flows and its impact on returns and volatility

R Beaumont, M van Daele, B Frijns, T Lehnert, A Muller

Research output: Contribution to journalArticleAcademicpeer-review


The purpose of this paper is to investigate the impact of individual investor sentiment on
the return process and conditional volatility of three main US market indices (Dow Jones Industrial
Average, S&P500 and Nasdaq100). Individual investor sentiment is measured by aggregate money
flows in and out of domestically oriented US mutual funds.
Design/methodology/approach – A generalised autoregressive conditional heteroscedasticity
(GARCH)-in-mean specification is used, where our measure for individual sentiment enters the mean
and conditional volatility equation.
Findings – For a sample period of six years (February 1998 until December 2004), we find that
sentiment has a significant and asymmetric impact on volatility, increasing it more when sentiment is
bearish. Using terminology of De Long et al., we find evidence for the ‘‘hold more’’ effect, which states
that when noise traders hold more of the asset, they also see their returns increase, and the ‘‘create
space’’ effect, which states that noise traders are rewarded for the additional risk they generate
Originality/value – In contrast to existing studies using explicit measures of market sentiment on
low sampling frequencies, the use of daily mutual flow data offers a unique picture on investors’
portfolio rebalancing and trading behavior. We propose an integrated framework that jointly tests for
the effects of mutual fund flows on stock return and conditional volatility.
Original languageEnglish
Pages (from-to)772-785
Number of pages14
JournalManagerial Finance
Issue number11
Publication statusPublished - 2008
Externally publishedYes


  • Behavioral economies
  • Flow of funds
  • Fund management
  • Investors
  • Unit trusts


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