Working Paper: CEPR ID: DP15654
Authors: Eric Ghysels; Hanwei Liu; Steve Raymond
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.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher granularity (HHI) (F12) | Increased downside risk (D81) |
| Higher granularity (HHI) (F12) | Increased volatility (E32) |
| Higher granularity (HHI) (F12) | Increased expected returns (G17) |
| Institutional investor concentration (G23) | Increased downside risk (D81) |
| Institutional investor concentration (G23) | Increased volatility (E32) |
| Higher granularity (HHI) (F12) | Increased conditional volatility (C58) |
| Institutional investor concentration (G23) | Increased conditional volatility in high-HHI portfolios (G19) |