Common Fund Flows: Flow Hedging and Factor Pricing / Leonid Kogan, Winston Wei Dou, Wei Wu.

Format:

Book

Author/Creator:

Dou, Winston Wei.

Contributor:

National Bureau of Economic Research.

Kogan, Leonid.

Wu, Wei.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30234.

NBER working paper series no. w30234

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

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.

Notes:

Print version record

July 2022.