Market Returns and Mutual Fund Flows

[...]In this study, we use recent historical evidence toexplore one dimension of the broad relationship betweenmarket returns and mutual fund flows: the effect of shorttermmarket returns on mutual fund flows. Research onthis issue has already confirmed high correlations betweenmarket returns and aggregate mutual fund flows (Warther1995). A positive-feedback process, however, requires notjust correlation but two-way causation between flows andreturns, in which fund investors react to market movementswhile the market itself moves in response to theinvestors’ behavior.[...]