Discussion Paper Details

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Title: Institutional Investors and Granularity in Equity Markets

Author(s): Eric Ghysels, Hanwei Liu and Steve Raymond

Publication Date: January 2021


Programme Area(s): Financial Economics

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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Bibliographic Reference

Ghysels, E, Liu, H and Raymond, S. 2021. 'Institutional Investors and Granularity in Equity Markets'. London, Centre for Economic Policy Research.