This paper aims to examine the information content of mutual fund flows and its indication on investors’ preference/tolerance toward risk.
Mutual funds are grouped into different categories based on assets with different levels of risk perceptions (e.g. equity fund, money market fund), and this information is publicly accessible. This paper examines the correlation patterns between fund flows and changes in credit default swaps (CDS) spreads. In addition, it also examines such a relation by dividing the samples into different fund types (e.g. retail vs institutional fund flows).
This paper suggests that equity fund flows are negatively related to CDS spreads, whereas money market fund flows are positively related to CDS spreads. Furthermore, it indicates that retail fund flows provide insightful information and serve as the primary driver behind the relation between fund flows and CDS spreads.
The findings of this paper indicate that flows into equity and money market funds could serve as a risk sentiment in credit markets. And this is the first study, to the best of the author’s knowledge, to establish such a linkage between fund flows and CDS spreads to help investors gauge credit market sentiment.
