The Determinants of Aggregate Fund Flows to Emerging Markets. A Push-Pull Analysis

This paper investigates how cyclical variables drive net aggregate fund flows towards emerging markets (EMs). Through the aggregation of net flows of all open-end dedicated funds, the analysis finds that flows in equity and fixed income are driven by recent past performance in both developed and emerging economies. Further analysis confirms that much of the evidence comes from US and EU larger mutual funds. A structural VAR shows that flows become more responsive through time to market uncertainty and rates. In particular, after the Great Recession flows exhibit a lower reaction to the S&P index, becoming more responsive to market volatility and to US interest rates. Furthermore the US consumer sentiment index has a key role in the explanation of fund flows and it increased through time with an effect that is more sluggish and persistent with respect to other cyclical variables