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We use 2 years of daily flows for three major Standard and Poor's index funds to analyze the relationship among index funds, asset prices, and volatility. We find strong contemporaneous correlation between inflows and returns, no evidence for positive feedback trading, and evidence that negative market returns may induce subsequent sales. Market volatility affects investors as dynamic risk sharing, but higher volatility does not drive investors from the market. Bullish newsletter sentiment is associated with greater inflows. We report high correlation among investor disagreement and market uncertainty and flows. Dispersion in advice and open interest correlate with lower inflows.
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Goetzmann et al. (2003) studied this question.
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