DP15654 Institutional Investors and Granularity in Equity Markets

Author(s): Eric Ghysels, Hanwei Liu, Steve Raymond
Publication Date: January 2021
Date Revised: January 2021
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15654

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.