Dynamics of mutual funds and stock markets in Asian developing economies

The study examines the relationship among mutual fund flows, stock market returns, and macroeconomic indicators for nine Asian developing economies. Data for the period 2001–2017 encompass more than 9600 equity and bond funds. Monthly frequency is used to analyze the relationship between fund flows and market returns, with quarterly frequency adopted with the incorporation of macroeconomic variables. The study employs a panel vector autoregressive model in the context of generalized method of moments estimation to identify the dynamic relationships. The findings suggest that fund flows respond to past stock market returns, equity fund flows positively so and bond fund flows negatively so. Once macroeconomic variables are controlled for, a reverse causality from fund flows to market returns is not discerned. The study further finds bi-directional causality between fund flows and macroeconomic conditions, which means not only do investors respond to past conditions, they also correctly anticipate future conditions.