Crowding and Factor Returns

51 Pages Posted: 15 Mar 2021

See all articles by Wenjin Kang

Wenjin Kang

School of Finance, Shanghai University of Finance and Economics

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University

Date Written: March 13, 2021

Abstract

This paper documents that crowding by market participants affects the expected return to popular factor strategies such as value, momentum, and carry. Using data published by the CFTC for commodity futures markets, we construct a direct measure of factor strategy crowding that is based on the aggregate positioning of market participants. We show that this crowding measure has a strong negative predictive impact on expected factor strategy returns. Historical factor strategy returns are accumulated primarily during periods of low crowding. We link variation in our crowding measure to macroeconomic fundamentals and suggest that the reduction of factor strategy returns is related to variation in the cost of arbitrage capital.

Keywords: Crowding, Factor Investing, Carry, Momentum, Value, Commodity Futures, Commodities

JEL Classification: G11,G13

Suggested Citation

Kang, Wenjin and Rouwenhorst, K. Geert and Tang, Ke, Crowding and Factor Returns (March 13, 2021). Available at SSRN: https://ssrn.com/abstract=3803954 or http://dx.doi.org/10.2139/ssrn.3803954

Wenjin Kang

School of Finance, Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

K. Geert Rouwenhorst (Contact Author)

Yale School of Management - International Center for Finance ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University ( email )

No.1 Tsinghua Garden
Beijing, 100084
China

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