Informational Content of Institutional Demand for Industries

Abstract

In this paper, I introduce a new methodology for predicting quarterly industry expected returns by estimating Revealed Industry Expectations (RIE) inferred from portfolio holdings data. I approximate wedges in quarterly return expectations of institutional investors and an aggregate household using observed deviations in their portfolio holdings relative to passive benchmarks. Then, I construct an investor-industry-level Wedge Accuracy Score (WAS) based on the historical co-movement between the wedges and realized industry returns. Finally, I construct RIE by averaging the wedges across investors within each industry-quarter, weighted according to each investor's WAS.

Keywords: Asset Pricing, Institutional Demand, Return PRedictability, Industry Returns