The effects of U.S. monetary policy shocks on mutual fund investing

Ayelen Banegas, Gabriel Montes-Rojas, Lucas Siga

Research output: Contribution to journalArticlepeer-review

Abstract

We study the effects of unexpected changes in the stance of U.S. monetary policy on the performance and flows of mutual funds investing in domestic and international financial markets over the recent period of unconventional monetary policy. Taking an agnostic approach on the transmission mechanism of monetary policy, we find that monetary policy shocks have a direct effect on fund performance and flow dynamics, and that the effect of these surprises differs by investment strategy. Results show that an unexpected tightening of the stance of policy is associated with negative performance and outflows from fixed-income funds, in particular those investing in international, government and investment grade bond markets. Results also point to a negative relationship between equity fund performance and policy tightening. Moreover, our findings indicate that Federal Reserve's expansionary balance sheet policy (i.e. large-scale asset purchases) has a strong positive effect on the performance and flows of equity funds, especially on those investing in emerging markets.

Original languageEnglish (US)
Article number102595
JournalJournal of International Money and Finance
Volume123
DOIs
StatePublished - May 2022

Keywords

  • Monetary policy shocks
  • Mutual fund performance and flows

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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