Peng, Cameron and Wang, Chen (2021) Factor demand and factor returns. Financial Markets Group Discussion Papers (829). Financial Markets Group, The London School of Economics and Political Science, London, UK.
![]() |
Text (DP829)
- Published Version
Download (801kB) |
Abstract
A mutual fund's demand for a pricing factor, measured by the loading of the fund's returns on the factor's returns, is persistent over time. When stock characteristics are time-varying and change frequently, persistence in factor demand generates a need for rebalancing. This rebalancing motive, in turn, leads to predictable trading from mutual funds and contributes to cross-sectional return predictability. In particular, when there is a "mismatch" between a stock's characteristic and the underlying funds' demand for that characteristic, the "mismatched" stock will face selling pressure from the underlying funds and subsequently earn lower returns. Double-sorting on stocks' characteristics and mutual funds' factor demand refines value and momentum strategies, generating abnormal returns that cannot be explained by subsequent fundamentals or retail trading flows.
Item Type: | Monograph (Discussion Paper) |
---|---|
Official URL: | https://www.fmg.ac.uk/ |
Additional Information: | © 2021 The Authors |
Divisions: | Finance |
Subjects: | H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance |
JEL classification: | G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions |
Date Deposited: | 23 May 2023 12:54 |
Last Modified: | 16 May 2024 12:27 |
URI: | http://eprints.lse.ac.uk/id/eprint/118884 |
Actions (login required)
![]() |
View Item |