Mutual Fund Flows and Extrapolative Investors’ Expectations : The German Case

In this paper the relation between aggregate mutual fund flows and stock market returns isanalysed with respect to three issues. First, we study the relation between fund flows andlong-term realized returns (past, current and future). Second, we find out that fund flows arenot driven by fundamentally expected returns. Mutual fund investors appear to have naïveexpectations, as it seems that they just extrapolate past price trends into the future. This leadsto a substantial performance loss of more than one percentage point per year. Third, the firstlypresented results of the German fund market resemble those of the US market. Differencesbetween the two fund markets do not seem to influence investor beha viour.