Institutional Investors, Households and the Time-Variation in Expected Stock Returns

Journal of Financial and Quantitative Analysis, forthcoming

73 Pages Posted: 27 May 2017 Last revised: 7 Feb 2022

See all articles by Rüdiger Weber

Rüdiger Weber

WU Vienna; Vienna Graduate School of Finance (VGSF)

Date Written: August 3, 2018

Abstract

I document a new stylized fact: the higher the degree of institutional ownership (IO) in a portfolio, the more time-varying expected returns rather than changes in expected cash flows drive changes in its valuation. Empirical evidence suggests that institutions’ time-varying sensitivity to the risk of holding stocks translates into time-varying expected returns on high-IO stocks. In my model, imperfect risk sharing between different types of investors generates cross-sectional differences in return predictability based on ownership, even among a-priori identical stocks. My findings suggest an economic rationale for weak return predictability of small stocks and predictability reversals of stocks and REITs.

Keywords: time-series return predictability, households, institutional ownership, financialization, heterogeneous agents

JEL Classification: G12, G17, G23, G50

Suggested Citation

Weber, Rüdiger, Institutional Investors, Households and the Time-Variation in Expected Stock Returns (August 3, 2018). Journal of Financial and Quantitative Analysis, forthcoming, Available at SSRN: https://ssrn.com/abstract=2975342 or http://dx.doi.org/10.2139/ssrn.2975342

Rüdiger Weber (Contact Author)

WU Vienna ( email )

Welthandelsplatz 1 1
Wien, 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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