Extreme risk and small investor behavior in developed markets

This paper examines the responses of small investors of ten developed markets as they are exposed to extreme risk. We focus on mutual fund flows that are induced by extreme market episodes (measured daily, weekly, and monthly) versus volatile periods captured by the traditional standard deviation metric. The extreme-day measure captures the behavior of small retail investors in the US and Canada better than the traditional standard deviation measure, based on funds flows to equity mutual funds. The evidence for the other countries of the study is mixed. Small investors in countries in the G-7 with more collective (as opposed to individualistic) cultures show less responses to changes in risk.