The Interaction of Mutual Fund Flows and Stock Returns: Evidence From The Turkish Capital Market

The substantial growth and popularity of mutual funds as an investment tool has risen the need for an understanding of the significant implications for the financial markets. This paper examines the dynamic interaction between mutual fund flows and stock returns for an emerging capital market, namely Turkey and more specifically, analyzes the possibility of a causal mechanism whether mutual fund flows influence stock returns and vice versa. Long run dynamic relationship is examined by using cointegration tests, short-run dynamic causal relationship through vector error correction model. The results of cointegration test show that there is cointegrating relationship among each category of mutual fund flows and stock index. Moreover, the statistical evidence indicates that there is bidirectional causality between all categories of mutual fund flows and stock returns. Thus, the empirical findings will prove to be extremely useful information for investors who need to understand these dynamic interactions.