Which Investors Matter for Global Equity Valuations and Expected Returns?

51 Pages Posted: 28 Jun 2019

See all articles by Ralph S. J. Koijen

Ralph S. J. Koijen

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Robert Richmond

New York University (NYU) - Department of Finance

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

Date Written: June 3, 2019

Abstract

A large literature in asset pricing decomposes valuation ratios into expected returns and expected growth rates of firm fundamentals to understand why valuation ratios vary across firms and over time. This literature leaves two fundamental questions unanswered: (i) what information do investors attend to in forming their demand beyond prices and (ii) how important are various investors in the price formation process? We use a demand system approach to answer both questions. Empirically, we show that a small set of characteristics explains the majority of variation in a panel of firm-level valuation ratios across countries. We then estimate an international asset demand system using investor-level holdings data in Great Britain and the United States, allowing for flexible substitution patterns within and across countries. We use this framework to measure the contribution of each institutional type in linking characteristics to prices and long-horizon expected returns. Investment advisors, largely driven by their size, are most influential among all institutional types. Conditional on size, hedge funds are the most, and long-term investors (insurance companies and pension funds) are the least influential.

Suggested Citation

Koijen, Ralph S. J. and Richmond, Robert and Yogo, Motohiro, Which Investors Matter for Global Equity Valuations and Expected Returns? (June 3, 2019). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-92. Available at SSRN: https://ssrn.com/abstract=3378340 or http://dx.doi.org/10.2139/ssrn.3378340

Ralph S. J. Koijen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/ralph.koijen/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert Richmond

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Motohiro Yogo

Princeton University - Department of Economics ( email )

Julis Romo Rabinowitz Building
Princeton, NJ 08544
United States

HOME PAGE: http://sites.google.com/site/motohiroyogo/

National Bureau of Economic Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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