Foreign currency exchange rates and mutual fund cash flows

We provide new evidence linking foreign currency exchange rates and cash flows in and out of US-based international mutual funds. Our results suggest that changes in exchange rates and the associated volatility of those changes are important considerations when investors decide to purchase or redeem international mutual fund share. Specifically, we find that increased exchange rate volatility is positively and significantly related to 1- and 3-year net cash flows into and out of funds. We also document a negative relationship between short-term (previous year) and longer-term (previous 3 years) changes in foreign currency values.