#2212. Endogeneity in the mutual fund flow–performance relationship: An instrumental variables solution

July 2026publication date
Proposal available till 30-05-2025
4 total number of authors per manuscript3510 $

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Journal’s subject area:
Finance;
Economics and Econometrics;
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Abstract:
We use an instrumental variables (IV) approach to examine the effects of dynamic endogeneity when estimating the relationship between mutual fund flows and performance. Unlike the one-stage estimation approach commonly used in prior research, the IV approach allows us to address reverse causality between flow and performance. Through rigorous exclusion tests, we conclude that fund media coverage, risk ranking, and management structure win in a horse race as exogenous instruments for fund flow, while the fund turnover ratio and institutional share perform best as instruments for fund performance.
Keywords:
2SLS; Endogeneity; Flow–performance relationship; Fund flows; Instrumental variables; Model specification; Mutual funds; Portfolio performance; Reverse causality

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