Working Paper: NBER ID: w11526
Authors: Andrea Frazzini; Owen A. Lamont
Abstract: We use mutual fund flows as a measure for individual investor sentiment for different stocks, and find that high sentiment predicts low future returns at long horizons. Fund flows are dumb money – by reallocating across different mutual funds, retail investors reduce their wealth in the long run. This dumb money effect is strongly related to the value effect. High sentiment also is associated high corporate issuance, interpretable as companies increasing the supply of shares in response to investor demand.
Keywords: mutual funds; investor sentiment; stock returns; wealth destruction
JEL Codes: G14; G23; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high sentiment (mutual fund inflows) (G23) | low future returns (G17) |
| high mutual fund inflows (G23) | low future stock returns (G17) |
| mutual fund flows into growth stocks (G23) | flows out of value stocks (G11) |
| dumb money effect (G41) | wealth reduction on average (G51) |