Fragile Factor Premia

54 Pages Posted: 20 Jan 2019

See all articles by Shiyang Huang

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Yang Song

University of Washington - Michael G. Foster School of Business

Hong Xiang

The University of Hong Kong

Date Written: January 9, 2019

Abstract

We demonstrate that returns and volatilities of the Fama-French size and value factors are significantly determined by non-fundamental flow-induced trading from actively managed equity mutual funds. Mutual fund flows are largely ignorant about systematic risks. These non-fundamental shifts in demand induce large return heterogeneity within and across the Fama-French size and book-to-market portfolios. We show that aggregate mutual fund flow- induced trades across the size and book-to-market spectrum significantly influence the size and value premia, followed by large subsequent reversals. We also find that the expected volatilities of mutual funds’ flow-induced trades strongly predict future factor volatilities. Our results highlight the importance of non-fundamental demand shocks in determining factor premia and factor volatilities.

Keywords: Mutual fund flows, factor premia, factor volatility

JEL Classification: G10

Suggested Citation

Huang, Shiyang and Song, Yang and Xiang, Hong, Fragile Factor Premia (January 9, 2019). Available at SSRN: https://ssrn.com/abstract=3312837 or http://dx.doi.org/10.2139/ssrn.3312837

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yang Song (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Hong Xiang

The University of Hong Kong ( email )

Hong Kong

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