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Can mutual fund flows serve as market risk sentiment? An empirical analysis with credit default swaps (CDS) spreads

Hsin-Hui Chiu (Department of Finance, Financial Planning and Insurance, California State University Northridge, Northridge, California, USA)
Lu Zhu (Department of Finance, California State University Long Beach, Long Beach, USA)

Journal of Risk Finance

ISSN: 1526-5943

Article publication date: 20 March 2017

547

Abstract

Purpose

This paper aims to examine the information content of mutual fund flows and its indication on investors’ preference/tolerance toward risk.

Design/methodology/approach

Mutual funds are grouped into different categories based on assets with different levels of risk perceptions (e.g. equity fund, money market fund), and this information is publicly accessible. This paper examines the correlation patterns between fund flows and changes in credit default swaps (CDS) spreads. In addition, it also examines such a relation by dividing the samples into different fund types (e.g. retail vs institutional fund flows).

Findings

This paper suggests that equity fund flows are negatively related to CDS spreads, whereas money market fund flows are positively related to CDS spreads. Furthermore, it indicates that retail fund flows provide insightful information and serve as the primary driver behind the relation between fund flows and CDS spreads.

Originality/value

The findings of this paper indicate that flows into equity and money market funds could serve as a risk sentiment in credit markets. And this is the first study, to the best of the author’s knowledge, to establish such a linkage between fund flows and CDS spreads to help investors gauge credit market sentiment.

Keywords

Acknowledgements

The authors thank University of Wisconsin Eau Claire for the 2015 summer research funding support. The authors thank the Investment Company Institute for generously providing the data used in this study. The authors thank participants at the 2015 Southern Finance Association Annual Meetings, CSUN Department of Finance, Financial Planning & Insurance Spring 2016 Brown Bag Presentation and 2016 Academy of Financial Services Conference for valuable comments.

Citation

Chiu, H.-H. and Zhu, L. (2017), "Can mutual fund flows serve as market risk sentiment? An empirical analysis with credit default swaps (CDS) spreads", Journal of Risk Finance, Vol. 18 No. 2, pp. 159-185. https://doi.org/10.1108/JRF-08-2016-0103

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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