Which Investors Matter for Global Equity Valuations and Expected Returns?

Ralph Koijen, Robert Richmond and Motohiro Yogo
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Ralph Koijen: University of Chicago
Robert Richmond: New York University

Working Papers from Princeton University. Economics Department.

Abstract: To understand why valuation ratios vary across firms and over time, a large literature in asset pricing decomposes these ratios into expected returns and expected growth rates of firm fundamentals. This literature leaves two fundamental questions unanswered: (i) what information do investors attend to in forming their demand beyond prices and (ii) how important are different investors in the price formation process? We use a demand system approach to answer both questions. We first show that a small set of characteristics explains the majority of variation in a panel of firm-level valuation ratios across countries. We then estimate an asset demand system using investor-level holdings data, allowing for flexible substitution patterns within and across countries. We use this framework to measure the relative importance of investors — differentiated by type, size, and active share — for connecting firm characteristics to prices and long-horizon expected returns.

Keywords: price formation; investors (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-bec and nep-cwa
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2020-34

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