Flow-Based Asset Pricing: Maximum Price Impact Ratio

63 Pages Posted: 6 May 2022 Last revised: 15 Jun 2022

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: June 13, 2022

Abstract

We analyze the flow-driven fluctuations of the cross section of asset prices. We take the stance that price impacts of uninformative flows arise as marginal investors' risk compensation. We show that shorting the portfolio that incurs the maximum price impact for a given level of fundamental risk is the most efficient trading-against-flow strategy. To form this strategy, we build a new model of common factors of flows and common factors of fundamental returns and estimate the model using U.S. equity mutual fund flows into Fama-French three factors. Our strategy increases the out-of-sample annualized Sharpe ratio of 159 firm characteristics-based anomaly portfolios by an average of 0.3. Our evidence shows that risk-driven price impacts depend only on factor flows but not on idiosyncratic flows.

Keywords: asset pricing, cross section, flow, price impact, risk

JEL Classification: G12

Suggested Citation

An, Yu and Su, Yinan and Wang, Chen, Flow-Based Asset Pricing: Maximum Price Impact Ratio (June 13, 2022). 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/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
106
Abstract Views
360
rank
349,124
PlumX Metrics