Wharton Finance Faculty Research
Mutual Fund Flows and Fluctuations in Credit and Business Cycles
Azi Ben-Rephael, Jaewon Choi and Itay Goldstein
Forthcoming in the Journal of Financial Economics
- Downturns in real economic activity tend to be preceded by credit-market booms.
- In response, multiple measures have been proposed as early warning indicators of recessions.
- Goldstein, Ben-Rephael & Choi (2020) develop a new credit boom early indicator based on investors flow shifts towards high-yield bond mutual funds.
- Their measure leads all other previously proposed measures and has the advantage of being clearly linked to changes in investor demand.
- This indicator directly predicts the business cycle by positively predicting GDP growth and negatively predicting unemployment, and more specifically predicts indicators of credit booms, such as growth in financial intermediary balance sheets, increases in shares of high-yield bond issuers, and decreases of credit spreads.