Mutual fund flows, expected returns, and the real economy

The paper explores whether the co-movement of market returns and equity fundflows can be explained by a common response to macroeconomic news. I findthat variables that predict the real economy as well as the equity premium arerelated to mutual fund flows. Changes in dividend-price ratio explain mutual fundflows beyond the information contained in returns. Further predictive variablessuch as default spread, relative T-Bill rate and, in particular consumption-wealthratio also explain mutual fund flows. Mutual fund flows are, in accordance withthe information-response hypothesis, forward-looking and predict real economicactivity.