Institutional Investors and Granularity in Equity Markets

Eric Ghysels, Hanwei Liu and Steve Raymond

No 15654, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The U.S. equity markets are largely driven by actions of institutional investors. Using quarterly 13-F holdings, we construct the Herfindahl-Hirschman Index of institutional investor concentration as a measure of granularity. We study how granularity affects: the cross-section of returns, conditional variances and downside risk. Next, we study the impact of granularity in a demand-driven asset pricing model introduced by Koijen and Yogo (2019). We derive a decomposition of expected returns in terms of equally weighted asset demands and granularity residuals. Using this decomposition, we revisit the empirical stylized facts pertaining to granularity and asset pricing.

Date: 2021-01
New Economics Papers: this item is included in nep-cwa and nep-fmk
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