Discussion paper

DP15654 Institutional Investors and Granularity in Equity Markets

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.


Ghysels, E, H Liu and S Raymond (2021), ‘DP15654 Institutional Investors and Granularity in Equity Markets‘, CEPR Discussion Paper No. 15654. CEPR Press, Paris & London. https://cepr.org/publications/dp15654