Is the flow-performance relationship really convex? - The impact of data treatment and model specification


This paper challenges the convexity of the flow-performance relationship, according to which investors strongly chase top-performing funds, while fund flows exhibit little to no sensitivity to past performance within the segment of poorly performing funds. Our results suggest that the flow-performance relationship is not convex, but rather linear. In contrast to prior studies, we use reported (i.e., exact) instead of approximated fund flow data, we trim (instead of winsorize) outliers, and we account for persistence in fund flows. We find that each factor contributes to serious biases. For example, investor reactions to poor performance only appear insignificant when outliers are winsorized instead of trimmed. And it is even more evident that fund investors flee poorly performing funds when the model incorporates lagged flows to account for fund flow persistence. Furthermore, our results provide evidence that the degree to which investors chase top-performing funds appears to be slightly upward biased if approximated fund flows are used. Our findings have important implications for the potential moral hazard of fund managers.

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  1. 1.

    We control for fund mergers by calculating the sum of the TNA of all merged funds that flowed into an acquiring fund, and then adjust the respective fund flows accordingly.

  2. 2.

    The variable riskiness is based on the fund returns of the past twelve months. Therefore, the first analyzable observation is January 2000.


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Correspondence to Alexander Schiller.

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Schiller, A., Woltering, RO. & Sebastian, S. Is the flow-performance relationship really convex? - The impact of data treatment and model specification. J Econ Finan 44, 300–320 (2020).

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  • Mutual funds
  • Fund flows
  • Flow-performance relationship

JEL Classification

  • G10
  • G11
  • G23