The dynamics of market volatility, market return, and equity fund flow: International evidence

We identify and test the structural VAR model for the relations among market volatility, market return, and aggregate equity fund flows in an international context. The major empirical findings are as follows. First, reduced-form and structural VAR analyses demonstrate that the relations among the three variables are most evident in the U.S. Second, the structural VAR model shows that contemporaneous effects are the most relevant factor in these relations. Third, the results of a variance decomposition analysis imply that Western investors are more concerned with market volatility and return than Asian investors when they buy and redeem equity funds. Fourth, the hypothesis tests reveal that the overall effects observed in this study are largely attributable to contemporaneous effects. In conclusion, the empirical evidence from the U.S. might not be directly applicable to other countries, particularly Asian countries.