Using stepwise reality check to analyze open-end fund investors’n herding redemption in Taiwan

Nan Yu Wang, Chih Jen Huang, Ying Lin Hsu, Shian Chang Huang

Research output: Contribution to journalArticle

Abstract

This study aims to examine whether funds with illiquid assets exhibit stronger sensitivity of redemption outflows to bad past performance than funds with liquid assets. An important aspect of our study is whether large outflows should damage future fund performance in illiquid funds more than in liquid funds. When redeemed in a large scale, the liquidity risk of open-end funds will increase, which in turn leads to a vicious circle between fund redemption and the net asset value decline. Accordingly, Stepwise Reality Check method is taken into account of the financial stability problem and to control for the data-snooping bias. Based on the sample of underperformed mutual funds in Taiwan, the empirical results show that (1) bad past performance in liquid funds is more sensitive on flow-performance relations; (2) The evidence in (1) exists only for institutional-oriented funds, but not for retail-oriented funds; and (3) Illiquid funds damage from a large number redemptions with significant return persistence. The above findings provide valuable references for fund managers to make the plan of their investments.

Original languageEnglish
Pages (from-to)260-272
Number of pages13
JournalInternational Journal of Economics and Financial Issues
Volume5
Issue number1
Publication statusPublished - 2015 Jan 1

Fingerprint

Reality check
Taiwan
Herding
Damage
Assets
Fund performance
Fund managers
Financial stability
Empirical results
Retail
Data snooping
Mutual funds
Asset value
Persistence
Liquidity risk

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance(all)

Cite this

@article{191ac161d20343f4b831676a3861dbd3,
title = "Using stepwise reality check to analyze open-end fund investors’n herding redemption in Taiwan",
abstract = "This study aims to examine whether funds with illiquid assets exhibit stronger sensitivity of redemption outflows to bad past performance than funds with liquid assets. An important aspect of our study is whether large outflows should damage future fund performance in illiquid funds more than in liquid funds. When redeemed in a large scale, the liquidity risk of open-end funds will increase, which in turn leads to a vicious circle between fund redemption and the net asset value decline. Accordingly, Stepwise Reality Check method is taken into account of the financial stability problem and to control for the data-snooping bias. Based on the sample of underperformed mutual funds in Taiwan, the empirical results show that (1) bad past performance in liquid funds is more sensitive on flow-performance relations; (2) The evidence in (1) exists only for institutional-oriented funds, but not for retail-oriented funds; and (3) Illiquid funds damage from a large number redemptions with significant return persistence. The above findings provide valuable references for fund managers to make the plan of their investments.",
author = "Wang, {Nan Yu} and Huang, {Chih Jen} and Hsu, {Ying Lin} and Huang, {Shian Chang}",
year = "2015",
month = "1",
day = "1",
language = "English",
volume = "5",
pages = "260--272",
journal = "International Journal of Economics and Financial Issues",
issn = "2164-4138",
publisher = "EconJournals",
number = "1",

}

Using stepwise reality check to analyze open-end fund investors’n herding redemption in Taiwan. / Wang, Nan Yu; Huang, Chih Jen; Hsu, Ying Lin; Huang, Shian Chang.

In: International Journal of Economics and Financial Issues, Vol. 5, No. 1, 01.01.2015, p. 260-272.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Using stepwise reality check to analyze open-end fund investors’n herding redemption in Taiwan

AU - Wang, Nan Yu

AU - Huang, Chih Jen

AU - Hsu, Ying Lin

AU - Huang, Shian Chang

PY - 2015/1/1

Y1 - 2015/1/1

N2 - This study aims to examine whether funds with illiquid assets exhibit stronger sensitivity of redemption outflows to bad past performance than funds with liquid assets. An important aspect of our study is whether large outflows should damage future fund performance in illiquid funds more than in liquid funds. When redeemed in a large scale, the liquidity risk of open-end funds will increase, which in turn leads to a vicious circle between fund redemption and the net asset value decline. Accordingly, Stepwise Reality Check method is taken into account of the financial stability problem and to control for the data-snooping bias. Based on the sample of underperformed mutual funds in Taiwan, the empirical results show that (1) bad past performance in liquid funds is more sensitive on flow-performance relations; (2) The evidence in (1) exists only for institutional-oriented funds, but not for retail-oriented funds; and (3) Illiquid funds damage from a large number redemptions with significant return persistence. The above findings provide valuable references for fund managers to make the plan of their investments.

AB - This study aims to examine whether funds with illiquid assets exhibit stronger sensitivity of redemption outflows to bad past performance than funds with liquid assets. An important aspect of our study is whether large outflows should damage future fund performance in illiquid funds more than in liquid funds. When redeemed in a large scale, the liquidity risk of open-end funds will increase, which in turn leads to a vicious circle between fund redemption and the net asset value decline. Accordingly, Stepwise Reality Check method is taken into account of the financial stability problem and to control for the data-snooping bias. Based on the sample of underperformed mutual funds in Taiwan, the empirical results show that (1) bad past performance in liquid funds is more sensitive on flow-performance relations; (2) The evidence in (1) exists only for institutional-oriented funds, but not for retail-oriented funds; and (3) Illiquid funds damage from a large number redemptions with significant return persistence. The above findings provide valuable references for fund managers to make the plan of their investments.

UR - http://www.scopus.com/inward/record.url?scp=84979808237&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84979808237&partnerID=8YFLogxK

M3 - Article

VL - 5

SP - 260

EP - 272

JO - International Journal of Economics and Financial Issues

JF - International Journal of Economics and Financial Issues

SN - 2164-4138

IS - 1

ER -