Which Investors Matter for Equity Valuations and Expected Returns?

Abstract

Meeting. We thank Miguel Ferreira and Pedro Matos for discussions regarding the FactSet data. Ralph Koijen gratefully acknowledges support from the Center for Research in Security Prices. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Characteristics-driven returns in equilibrium

“…Koijen and Yogo (2019) show that characteristics-based demands can be viewed as optimal if characteristics are informative for the evaluation of the first two moments of expected returns. Several studies document the preference of certain investors for particular characteristics (Froot and Teo (2008), Kumar (2009), Cronqvist et al (2015), Betermier et al (2017), Koijen et al (2020) and Balasubramaniam et al (2021)), so that optimality is not necessarily an imperative requirement.…”

Trading, Ambiguity and Information in the Options Market

“…Indeed, canonical consumption models predict that all individuals ought to participate in financial markets (e.g., Merton, 1975), yet many households are disengaged with financial markets, even wealthy households (e.g., Haliassos and Bertaut, 1995;Briggs et al, 2021). On the other hand, it is well appreciated that sophisticated market participants play an outsized role in shaping market outcomes (Koijen et al, 2020), such that even small changes in sophisticated participants trading behaviors may have important consequences (e.g., Jansen, 2021). Thus, it is a natural and important question to understand what drives the participation and trading decisions of sophisticated investors.…”

“…This literature has focused on the informed trades by myriad market participants, such as activists (Collin-Dufresne and Fos, 2015), insiders (Cohen et al, 2012;Augustin et al, 2019), short-sellers (Boehmer et al, 2008;Engelberg et al, 2012) and even options traders (Chakravarty et al, 2004). It is important to understand what drives sophisticated investors to trade because these investors play an outsized role in determining market outcomes (Koijen et al, 2020). At the same time, a broadly held view about sophisticated investors is that they are more immune to non-classical frictions the afflict retail traders.…”

Does Disagreement Facilitate Informed Trading?

“…By connecting the actions of sophisticated investors to the uninformed trades induced by disagreement, we provide a useful connection between the large disagreement literature and the intuition that sophisticated investors play an outsized role in shaping market outcomes. Related to this latter perspective,Koijen et al (2020) show that sophisticated investors, particularly hedge funds and small active funds, are the most influential investors in shaping equity market valuations and expected returns.…”