Description:
We study the relation between market returns and unexpected aggregate flow into U.S. equity funds, using semi-weekly and daily flow data. The reaction of flow and return --whether it be one reacting to the other, or both reacting to a third factor -- is fast and strong. The flow-return relation is mainly concurrent, but flow also follows returns with a one-day lag. The lagged response of flow indicates either a common response of both returns and flow to new information, or positive feedback trading. Additional tests suggest that the concurrent relation reflects flow driving returns