Abstract: We develop two perspectives on principal components of institutional trading in equity markets, reflecting covariance across assets or covariance between managers. Singular value decomposition links these perspectives into two-dimensional (stock × manager) trading factors. Each trading factor captures a systemic change in the array of demand for stocks by managers. Alignment of stocks into principal baskets is more persistent than alignment of managers into principal networks, but both contribute (out-of-sample) explanatory power. Trading factors extend the demand-based asset pricing framework of Koijen and Yogo (2019) beyond ‘the usual (asset characteristic) suspects,’ substantially improving explained variance in returns. Moreover, trading factors partially subsume characteristics’ ability to explain returns.
Presenter: Roger Edelen, Virginia Tech University, Pamplin College of Business Administration
Co-authors: Jalshayin Bhachecha and Ngoc-Khanh Trana
Room: 537
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