23 Behavioural Finance and Mutual Fund Flows
Global Financial Institute
The second hypothesis is that patience as a behavioural vari-
only using the data sample before the crisis.8 The results are
able is a measure of how impulsive investors are trading. This
depicted in Table H. The results do not change substantially.
translates into the fact that patient countries execute fewer
However, we observe a higher coefficient in the return-loss
trades in and out in short-term periods.7 Thus we performed
aversion variable and an increased explanatory power com-
regressions on squared flows as a proxy of how volatile the
pared to the results of the whole sample. Performing the same
flows are across countries by considering the squared return,
regression for the time after the crisis period does not give any
including the loss aversion term as well. Table G presents
significant coefficient estimates for any of the variables, includ-
the results and shows that patience has a significantly nega-
ing the returns.9 There could be many reasons for this. After
tive coefficient. This implies that in patient countries where
the crisis, increased anxiety in the markets, cash constraints,
a larger population is willing to wait to realise a financial out-
and future economic uncertainty could lead to unsystematic
come, flows exhibit significantly less volatility. The results sup-
inflows or outflows that cannot be fully explained by returns
port the hypothesis that impatience induces impulsive trading
and the particular behavioural variables we considered in this
and hence higher volatility in flows. The interaction term of
study. Statistical insignificance of all coefficients could also
return volatility and loss aversion has a significantly positive
be related to a very small time series sample for the period
coefficient – modeling the excess volatility in flows caused by
after the crisis. Despite this, including the after-crisis period
returns volatility and loss aversion. Returns volatility without
does not hurt the main findings as demonstrated in Table F
the interaction to loss aversion is not statistically significant.
and Table G.
Finally, to check if the financial crisis affected any of our find-
Table H: Fama-MacBeth regressions on the ag-
ings, we performed Fama-MacBeth regressions on the flows
gregate equity fund flows with heteroscedasticity-adjusted Newey-West standard errors for t-statistics.
Table G: Fama-MacBeth regressions on the squared aggregate equity fund flows with heteroscedasticity-adjusted Newey-West standard errors for t-statistics. Regression on Flow(t)²
Intercept R(t)²
R(t)²*Loss log(Patience) Aversion²
Coefficients t-statistics
5.326 2.791
-7.658 -2.040
-0.130 -1.875
0.031 2.472
Table G: Fama-MacBeth regressions on the squared aggregate equity fund flows with heteroscedasticity-adjusted Newey-West standard errors for t-statistics. Flow and returns are both crosssectional time series whereas loss aversion and patience are solely cross-sectional observations. t-statistics values exceeding -/+1.96 show 5% statistical significance (p<0.05).
Regressions On Flow(t)
Intercept Return(t)
Loss Aversion
Return(t)* Loss Aversion
Patience
Coefficients t-statistics
-0.03 -0.05
0.183 1.211
8.83 2.38
0.093 0.134
-0.085 -0.99
Table H: Fama-MacBeth regressions on the aggregate equity fund flows with heteroscedasticity-adjusted Newey-West standard errors for t-statistics. Flow and returns are both cross-sectional time series for the time period before crisis (2007 June) whereas loss aversion and patience are solely cross-sectional observations. t-statistics values exceeding -/+1.97 show 5% statistical significance (p<0.05). Moreover, the explanatory powers of the regressions’ R-squared and adjusted R-squared values are found to be R-squared=0.2815 and Adjusted R-squared=0.0935.
Short-term period here stands for monthly frequency. Before crisis period is considered broadly as prior to 2007 June and after crisis is considered as after 2007 June. 9 For the sake of brevity we do not report the regression results of after crisis time period. 7 8