Flow-Based Asset Pricing: A Factor Framework of Cross-Sectional Price Impacts

77 Pages Posted: 6 May 2022 Last revised: 31 Dec 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: December 30, 2022

Abstract

We study how noisy flows impact the cross-section of asset prices. Our framework emphasizes the interaction between the factor structure of flows and the risk structure of assets. Specifically, systematic flows into systematic risk factors imply a factor model of price impacts. We develop empirical methods for the model by introducing flows into classical portfolio tools, including the Sharpe ratio, the Fama-MacBeth regression, the Fama-French portfolios, and the Gibbons-Ross-Shanken test. We estimate the model using U.S. equity mutual fund flows data. The model-implied strategy that optimally profits from flows improves the investment performance of most existing characteristics-based anomaly portfolios.

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

JEL Classification: G12

Suggested Citation

An, Yu and Su, Yinan and Wang, Chen, Flow-Based Asset Pricing: A Factor Framework of Cross-Sectional Price Impacts (December 30, 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/

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