What Drives the Size and Value Factors?
37 Pages Posted: 2 Feb 2017 Last revised: 11 Feb 2021
Date Written: July 1, 2019
Academics often assume that price fluctuations of asset pricing factors are driven by cash flow and discount rate variation. However, I show that around 30% of fluctuations in the Fama-French size and value factors are temporary, demand-driven price pressures. Specifically, investors frequently make large capital reallocations across mutual funds of different size and value styles, generating large factor-level price movements that completely reverse subsequently. Further corroborating the demand-driven interpretation, these price pressures happen exclusively in periods when mutual funds place trades. Overall, the findings indicate that investor demand can explain a significant fraction of market-wide price movements.
Keywords: Asset Pricing Factors, Excess Volatility, Demand Effects, Price Pressures
JEL Classification: G10, G12, G23, G40
Suggested Citation: Suggested Citation