For Alpha Generation

Use Cases

We suggest some ways of using FlowPro data to make money

  • Contrarian
  • Momentum
  • Data Mining

#Contrarian

We deliver our view on what positioning looks like

You position underweight in markets or asset classes where we think positioning is overweight

You position overweight in markets or asset classes where we think positioning is underweight

#Momentum

We deliver our view on what flows looks like

You might, for example, go with the flow momentum 

You might, when you see flows slowing or reversing, take profits

#Data Mining

You access our data via API

You follow your own strategies, rather than assuming that contrarian or momentum strategies will work ex ante.

Flows and Prices

We highlight some research on the relationship between flows and prices.

Portfolio Inflows and Real Effective Exchange Rates: Does the
Sectorization Matter?

It has been well-established in the literature that portfolio inflows appreciate the real
effective exchange rate. However, the literature lacks a systematic empirical analysis of the impact of portfolio inflows by institutional sector or borrower type. This paper fills this gap by exploring the impact of the inflows of portfolio capital into three institutional sectors (government, banks and corporates) on the real effective exchange rate. Using a large sample of 73 countries, it shows that the effect of portfolio inflows on the real effective exchange rate depends on the sector the investment flows in. The findings are robust to different econometric methods, additional variables in the model, and various indicators of real effective exchange rates.

Rasmane Ouedraogo

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The portfolio flows of international investors

This paper explores daily international portfolio flows into and out of 44 countries from 1994 through 1998. We find several facts concerning the behavior of flows and their relationship with equity returns. First, we detect regional flow factors that have increased in importance through time. Second, the flows appear to be stationary, but far more persistent than returns. Third, flows are strongly influenced by past returns, a finding consistent with positive feedback trading by international investors. Fourth, inflows have positive forecasting power for future equity returns, and this power is statistically significant in emerging markets. Fifth, the sensitivity of local stock prices to foreign inflows is positive and large. Sixth, prices seem consistent with flow persistence, in that transitory inflows impact future returns negatively.

Ken Froot

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Portfolio Flows, Global Risk Aversion and Asset Prices in Emerging Markets

In recent years, portfolio flows to emerging markets have become increasingly large and volatile. Using weekly portfolio fund flows data, the paper finds that their short-run dynamics are driven mostly by global “push” factors. To what extent do these cross-border flows and global risk aversion drive asset volatility in emerging markets? We use a Dynamic Conditional Correlation (DCC) Multivariate GARCH framework to estimate the impact of portfolio flows and the VIX index on three asset prices, namely equity returns, bond yields and exchange rates, in 17 emerging economies. The analysis shows that global risk aversion has a significant impact on the volatility of asset prices, while the magnitude of that impact correlates with country characteristics, including financial openness, the exchange rate regime, as well as macroeconomic fundamentals such as inflation and the current account balance. In line with earlier literature, portfolio flows to emerging markets are also found to affect the level of asset prices, as was the case in particular during the global financial crisis.

Nasha Ananchotikul & Longmei Zhang

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Portfolio Flows, Global Risk Aversion and Asset Prices in Emerging Markets

We present causal evidence that non-fundamental correlated demand exerts a first-order impact on style returns. Mutual fund investors chase fund performance via Morningstar ratings, regardless of the rating methodology. Until June 2002, ratings depended on fund returns without any style adjustment, and thus mutual funds with the same investment style had highly correlated ratings. This methodology led rating chasing investors to direct capital into winning styles, exacerbating return chasing behavior. Capital flows exerted non-fundamental price pressure on the underlying stocks, creating style-momentum that reverted over time. In June 2002, Morningstar reformed its rating methodology so that ratings became equalized across styles. The
reform demonstrates the causal impact of rating chasing: once the reform was implemented, style-level price pressures via the mutual fund channel immediately became muted. Furthermore, the dispersion in style performance declined sharply, and style momentum and reversal disappeared. We estimate that Morningstar rating chasing explains a substantial part of the size and value factors’ time-series variation.

Itzhak Ben-David, Andrea Rossi, Jiacui Li & Yang Song

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Ben-David, Itzhak, Jiacui Li, Andrea Rossi, and Yang Song, “Style Investing, Positive Feedback Loops, and
Asset Pricing Factors,” Working Paper, 2020.

Buffa, Andrea M, Dimitri Vayanos, and Paul Woolley, “Asset management contracts and equilibrium prices,”
Technical Report, National Bureau of Economic Research 2019.

Campbell, John Y. and John H. Cochrane, “By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior,” Journal of Political Economy, 1999, 107 (2), 205–251.

Cochrane, John H., “Presidential Address: Discount Rates,” The Journal of Finance, 2011, 66 (4), 1047–1108.

Deuskar, Prachi and Timothy C. Johnson, “Market Liquidity and Flow-driven Risk,” The Review of Financial
Studies, 2011, 24 (3), 721–752.

Duffie, Darrell, “Presidential Address: Asset Price Dynamics with Slow-Moving Capital,” Journal of Finance, 2010,
65 (4), 1237–1267.

Gourinchas, Pierre-Olivier, Walker Ray, and Dimitri Vayanos, “A preferred-habitat model of term premia
and currency risk,” Working Paper, 2020.

He, Zhiguo and Arvind Krishnamurthy, “Intermediary Asset Pricing,” American Economic Review, 2013, 103
(2), 732–770.

Koijen, Ralph SJ, Robert J Richmond, and Motohiro Yogo, “Which investors matter for global equity
valuations and expected returns?,” Working Paper, 2019.

Vayanos, Dimitri and Jean-Luc Vila, “A preferred-habitat model of the term structure of interest rates,” Working
Paper, 2020.

Ralph Koijen’s contribution to research on the pricing of risk in equity and insurance markets

Remarks by Luis de Guindos, Vice-President of the ECB at the virtual ceremony awarding the 2020 Germán Bernácer Prize to Ralph Koijen

Frankfurt am Main, 22 November 2021

In the area of asset pricing, Ralph’s work explains why prices, including those of stocks and bonds, are far more volatile than their fundamentals would suggest. In particular, in a recent joint paper on the origins of financial fluctuations,[2] Ralph and his co-author Xavier Gabaix of Harvard University describe how the amount of money flowing into the stock market affects prices. This work in particular has received wide coverage in the financial press.[3]

How funds flowing into the stock market affect stock prices was not entirely clear. Before Ralph’s work, financial economists usually assumed that stock prices were determined by rational expectations about future, uncertain cash flows. At times, asset prices could be far from their fundamental value, reflecting how irrational, or boundedly rational, investors can be.

In their joint paper, Ralph and Xavier reconcile two apparently contradictory propositions, which many financial economists believe to be simultaneously true. First, stock prices are affected when “fresh money” is brought into the stock market, when a lot of people buy stocks with money not previously invested in the stock market. Second, every time someone buys a stock, someone else sells it. So there are effectively no flows into stocks: someone always holds the stock, and someone else always holds the money.

Ralph and Xavier reconcile these propositions through their concept of net inflow. Net inflow is an investment into a fund that must be put to work in the stock market. Their key insight revolves around that “must”. By far the most stock market investment is made through investment funds which have fairly rigid mandates governing their mix of stocks and other assets. These mandates imply that trade tends to occur between parties that cannot sell at current market prices and parties that urgently need to buy, at almost any cost. Prices overshoot, and even random financial flows can now matter a great deal for asset prices. Interestingly, in this setting, one euro of net inflows can drive up the capitalisation of the aggregate stock market by much more than one euro.

I can mention two examples of Ralph’s research on the importance of fund flows having clear policy implications. First, some people have criticised share buybacks of listed firms for redistributing funds to shareholders and managers too liberally, rather than funding new investment or employment.[4] Ralph’s research elucidates an additional mechanism through which share buybacks can move stock prices, suggesting that managers’ incentives to buy back shares on a large scale may be even larger than previously thought. Second, central bankers often point to a “portfolio rebalancing” channel or a “duration risk extraction” channel when explaining how quantitative easing programmes affect bond yields.[5] Ralph’s research on the importance of fund flows points to a new, complementary mechanism through which central bank net asset purchases affect yields, particularly when the assets in question are in somewhat limited supply.

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