What Do the Portfolios of Individual Investors Reveal About the Cross-Section of Equity Returns?

Abstract

We extract a parsimonious set of equity factors from comprehensive administrative data on the stockholdings of all Norwegian individual investors in 1996-2017. A three-factor model, featuring the market portfolio and long-short portfolios of stocks sorted by investor age or wealth, explains both the common variation in portfolio holdings and the cross-section of stock returns. Portfolio tilts toward investor factors correlate with indebtedness, macroeconomic exposure, gender, education, and investment experience. Our results are consistent with hedging and sentiment jointly driving portfolio decisions and the cross-section of equity premia.

Keywords: Asset pricing, factor-based investing, household finance, portfolio allocation.

JEL Classification: G11, G12.