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Flow-induced trades and asset pricing factors

  • 2019.03.19
  • Event
Speaker: Dr. Yang Song (University of Washington)

Topic:

  Flow-induced trades and asset pricing factors

 

Time&Date: 

  13:00-14:15 pm, 2019/3/22 (Friday)

Venue:

  Room 619, Teaching A

Speaker:

Dr. Yang Song (University of Washington)
Abstract: We show that mutual funds’ flow-induced trades significantly influence returns and co- movement among 50 well-known asset pricing “factors.” Mutual fund investors are ignorant about both systematic and idiosyncratic risks when allocating capital among funds. We measure the non-fundamental demand shocks to each factor by aggregating mutual funds’ flow-induced trading of individual stocks underlying the factor. We show that flow-induced demand shifts largely determine factor return dynamics and that the expected (co)variance of flow-induced trades of factors strongly forecasts factor return (co)variance. Our results indicate that these factors are heavily exposed to flow-driven “noise trader” risk, which we further show is significantly priced. The flow-driven effects on factor return dynamics can partially explain factor momentum and underperformance of large-sized mutual funds relative to small funds.