The Dynamic Effects of Stock Prices on Mutual Fund Flows and Volume in the Korean Stock Market
Heung-Joo Cha

Abstract
This paper examines the dynamic relationship among security returns, equity mutual fund flows, and trading volume using the monthly Korean stock market data. We employ various empirical methods including VAR analyses, Granger causality tests and a variation of the present value model. We find that Korean stock market returns Granger-cause equity mutual fund flows into the market, but not vice versa. We do not find evidence that the mutual fund flows directly affect stock market prices in the presence of fundamentals of firms. Instead, we find that fund flows seem to be influenced by the performance of the stock market and that investors try to forecast fundamentals of firms and change their demand for stocks accordingly.We find that the Korean stock market volume plays a significant role in predicting both returns and flows. This causal relationship is consistent with the sequential information arrival model (SEQ).

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