The relationship between mutual fund flows and stock market returns: A comparative empirical analysis

This paper examines the relationship between aggregate equity mutual fund flows and excess stock market returns in Hong Kong and Singapore. Our findings demonstrate that, in Hong Kong, two-way causality exists between aggregate equity mutual fund flows and stock market returns. In comparison, despite their close proximity and reputation as global hubs no such finding is reported in the case of Singapore. We find that in Singapore, neither aggregate equity mutual fund flows Granger-cause subsequent excess stock market returns nor excess stock market returns Granger-cause subsequent aggregate equity mutual fund flows. The difference in findings is attributed to the degree of openness for each country. Additionally, for both Hong Kong and Singapore, we find that contemporaneous aggregate unexpected equity mutual fund flows positively affect excess stock market returns and vice versa. The study contributes to the literature by providing support with what is already known in regards investor heuristics, that excess stock market returns has a positive effect on aggregate equity mutual fund flows.