How do fund liquidity responses during stress conditions impact fund flows, and what are the implications for investor protection and fund management

Abstract

This thesis investigates the flow-performance dynamics of equity mutual funds, focusing on their implications for financial stability. Through the analysis of a comprehensive dataset from Eikon Refinitiv, spanning from 2000 to 2023, we examine how market conditions, particularly liquidity and stress indicators like the VIX index, influence investor behavioursin these funds. Our findings reveal a convex flow-performance relationship in equity funds, with heightened sensitivity to past performance during periods of high market liquidity. Additionally, we demonstrate that funds with higher liquidity buffers are more resilient to outflows during market stress, underscoring the importance of liquidity management in mitigating systemic risks. These insights provide valuable guidance for policymakers and financial managers in fostering a more stable financial system.