A Study on Dynamic Relation between Fund Flows and Returns

Although the U.S. Federal Government decided to hold the base rate for the month of June, 2016, equity funds have experienced capital outflows due to Brexit uncertainties. In the generality of cases, timing of U.S. interest rate change and major commodities’ value are an important drivers of capital inflows; but, in the real world, the flows have reacted more to one over the others. Thus, it is meaningful to conduct a fundamental approach between key variables, in other words, finding primary drivers. The discussion under which capital inflows and/or returns are controled has been effective in practice. We derive a VAR approach to the dynamic relationship between fund flows and fund returns for the daily sample data from June of 2015 to August of 2016. The results show capital flows are followed by fund returns at statistically significant levels. As with the policy-makers, concentrating more on products and/or product-makers would be more effective concerning capital flows. An example is providing tax incentives since test results show that the higher the returns, the more the money flows into the financial markets.