Factor Demand and Factor Returns

68 Pages Posted: 13 Feb 2019 Last revised: 9 Mar 2023

See all articles by Cameron Peng

Cameron Peng

London School of Economics & Political Science (LSE) - Department of Finance

Chen Wang

University of Notre Dame - Mendoza College of Business

Date Written: March 7, 2023

Abstract

We propose a novel source of predictable price pressure resulting from mutual funds' factor rebalancing behavior. When a fund's factor demand is persistent, it needs to frequently rebalance its portfolio's factor exposure, leading to stock-level predictable trading and price pressure. We confirm the persistence of factor demand and show that factor rebalancing is prevalent and operates independently from trading induced by retail flows. Consistent with demand-induced price pressure, stocks whose characteristics are mismatched with the underlying funds' factor demand experience lower returns, whereas well-matched stocks experience higher returns. We rule out alternative explanations based on private information, skills, and herding.

Keywords: Factor Rebalancing, Mutual Funds, Price Pressure, Factor Returns

JEL Classification: G12, G23, G40

Suggested Citation

Peng, Cameron and Wang, Chen, Factor Demand and Factor Returns (March 7, 2023). Available at SSRN: https://ssrn.com/abstract=3327849 or http://dx.doi.org/10.2139/ssrn.3327849

Cameron Peng (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Chen Wang

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

HOME PAGE: http://chenwang.one/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
619
Abstract Views
2,771
Rank
75,220
PlumX Metrics