Common Fund Flows: Flow Hedging and Factor Pricing

Winston Dou, Leonid Kogan and Wei Wu

No 30234, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Active equity funds care about fund size, affected by fund flows that obey a strong factor structure with the common component responding to macroeconomic shocks. Funds hedge against common flows by tilting their portfolios toward low-flow-beta stocks, while household/retail and index investors overweight high-flow-beta stocks in equilibrium. Consequently, common flows earn a risk premium, leading to a multi-factor asset-pricing model resembling the ICAPM, even with myopic agents and unsophisticated fund clients. Exploiting quasi-experiments induced by the local-natural-disaster occurrences and the unexpected trade-war announcements, we find that an increased outflow risk faced by funds leads to more aggressive flow-hedging portfolio tilts.

JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-fmk and nep-ifn
Note: AP
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Citations: View citations in EconPapers (2)

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