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

78 Pages Posted: 6 May 2022 Last revised: 27 Oct 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: October 26, 2022

Abstract

We develop a new empirical framework that unifies the risk-based and demand-based approaches to studying the pricing implications of noisy flows. In our framework, price fluctuations follow a factor structure. Flows into factor portfolios change factor risk exposures, which drive time-series fluctuations in factor premiums. In the cross section, each asset’s price impact depends on its risk exposure to the factors. To build this framework, we introduce flows into classical portfolio tools, including the Sharpe ratio, Fama-MacBeth regression, Fama-French portfolios, and 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 firm 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 (October 26, 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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