Factor and Stock-Specific Disagreement and Trading Flows

79 Pages Posted: 23 Nov 2021 Last revised: 15 Mar 2023

See all articles by Fotis Grigoris

Fotis Grigoris

University of Iowa - Department of Finance

Christian Heyerdahl-Larsen

BI Norwegian Business School

Preetesh Kantak

Kelley School of Business

Date Written: November 18, 2021

Abstract

We study how disagreement on both factor and stock-specific risk exposures across many agents and securities impact asset prices. Our theoretical analyses predict that disagreement about factor dynamics drives larger flows into portfolios that are more exposed to the factors. Consequently, these concentrated bets on the factor lead to higher volatility and reduced diversification benefits. We then test these predictions using a novel empirical setting – exchange-traded funds (ETFs). We find that when factor disagreement rises, funds flow into the ETFs that mimic the factor. However, these increased flows induce high forward looking volatility of, and correlation risk within, the ETF.

Keywords: Disagreement, ETF, Lucas Orchard, Volatility and Correlation Risk

JEL Classification: D81, G11, G12

Suggested Citation

Grigoris, Fotis and Heyerdahl-Larsen, Christian and Kantak, Preetesh, Factor and Stock-Specific Disagreement and Trading Flows (November 18, 2021). Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2022, Available at SSRN: https://ssrn.com/abstract=3966636 or http://dx.doi.org/10.2139/ssrn.3966636

Fotis Grigoris

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

Christian Heyerdahl-Larsen

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Preetesh Kantak (Contact Author)

Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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