A Factor Framework for Cross-Sectional Price Impacts

70 Pages Posted: 6 May 2022 Last revised: 5 Mar 2024

See all articles by Yu An

Yu An

Johns Hopkins Carey Business School

Yinan Su

Johns Hopkins University - Carey Business School

Chen Wang

University of Notre Dame - Mendoza College of Business

Date Written: March 4, 2024

Abstract

We study how noise trading flows impact the cross-section of asset prices in a market where sophisticated investors enforce no-arbitrage. In our model, individual asset flows, aggregated at the factor level, drive fluctuations in factor risk premia, which in turn impact asset prices through beta pricing. This structure fits the reduced-form patterns of how each asset’s flow impacts its own price and other assets’ prices with only a few factor-level parameters. A model-implied trading strategy, designed to exploit the reversion of factor-level price impacts, delivers strong investment outcomes and improves the performance of a wide range of anomaly portfolios.

Keywords: cross-section, factor, flow, price impact, risk

JEL Classification: G11, G12

Suggested Citation

An, Yu and Su, Yinan and Wang, Chen, A Factor Framework for Cross-Sectional Price Impacts (March 4, 2024). Available at SSRN: https://ssrn.com/abstract=4098609 or http://dx.doi.org/10.2139/ssrn.4098609

Yu An (Contact Author)

Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Yinan Su

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Chen Wang

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

Notre Dame, IN 46556-5646
United States

HOME PAGE: http://chenwang.one/

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