Diversification driven demand for large stock

Huaizhi Chen

Journal of Financial Economics, 2025, vol. 172, issue C

Abstract: I show that as a portfolio’s value concentration increases, actively managed portfolios predictably trim large positions, maintaining a level of practical diversification. This rebalancing channel is concentrated at thresholds implied by regulatory guidelines and by a fund’s own risk management histories. Since larger stocks are typically held widely and in large weights, they experience a coordinated contrarian trading demand that originates from this form of risk management. Diversification driven demand captures a novel return-reversal pattern in the large stock portfolios. Compensating this source of demand accentuates momentum returns during the modern sample period (1990 to 2022).

Keywords: Momentum; Mutual funds; Portfolio management; Price pressure; Reversal; Risk management; Stock demand (search for similar items in EconPapers)
JEL-codes: G10 G11 G14 G40 G41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001175

DOI: 10.1016/j.jfineco.2025.104109

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