Working Paper: NBER ID: w16534
Authors: Alessandro Beber; Michael W. Brandt; Kenneth A. Kavajecz
Abstract: Investors rebalance their portfolios as their views about expected returns and risk change. We use empirical measures of portfolio rebalancing to back out investors' views, specifically their views about the state of the economy. We show that aggregate portfolio rebalancing across equity sectors is consistent with sector rotation, an investment strategy that exploits perceived differences in the relative performance of sectors at different stages of the business cycle. The empirical foot-print of sector rotation has predictive power for the evolution of the economy and future bond market returns, even after controlling for relative sector returns. Contrary to many theories of price formation, trading activity therefore contains information that is not entirely revealed by resulting relative price changes.
Keywords: orderflow; economic forecasting; sector rotation; portfolio rebalancing
JEL Codes: G0; G10; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large active orderflow into the materials sector (L79) | expanding economy (F43) |
| large active orderflow into consumer discretionary, financials, and telecommunications sectors (G29) | contracting economy (E26) |
| large orderflow movements (C69) | changes in the CFNAI index (C43) |
| sector orderflow movements (C69) | release of significant economic indicators (E60) |
| sector orderflow (C69) | macroeconomic fundamentals (E66) |
| low dispersion within sectors (C46) | stronger economic forecasts (F17) |