Portfolio Spillovers and a Limit to Diversification

50 Pages Posted: 8 Jan 2014 Last revised: 9 Sep 2016

See all articles by Bronson Argyle

Bronson Argyle

Brigham Young University - Department of Finance

Date Written: January 19, 2015

Abstract

Securities are exposed to the return shocks of seemingly unrelated securities in common mutual fund portfolios. Shocks to firm returns mechanically affect fund returns that hold these securities, which induce investor-driven flows and rebalancing, resulting in temporary flow-induced price pressure (FIPP) on other firms in common portfolios. Instrumenting to address flow/return endogeneity, a one standard deviation increase in the FIPP corresponds to a 15-60 bps increase in daily abnormal firm returns. This pressure reverses in 5-6 days and is larger for liquid firms and for funds experiencing outflows. Failing to properly estimate this correlation implies that an investor is exposed to nonsystematic risk.

Keywords: Spillover, Idiosyncratic Returns, Mutual Funds

JEL Classification: G12, G20, G14, G11

Suggested Citation

Argyle, Bronson, Portfolio Spillovers and a Limit to Diversification (January 19, 2015). Available at SSRN: https://ssrn.com/abstract=2343149 or http://dx.doi.org/10.2139/ssrn.2343149

Bronson Argyle (Contact Author)

Brigham Young University - Department of Finance ( email )

United States

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