Flow-Based Asset Pricing: Two Trading Desk Separation Theorem

65 Pages Posted: 6 May 2022 Last revised: 11 May 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: May 2, 2022

Abstract

In any market with uninformative flows, the maximum Sharpe-ratio portfolio can be separated into two. The first portfolio uses only fundamental information to maximize Sharpe ratio. The second portfolio provides liquidity to uninformative flows and maximizes price impact ratio, which is defined as a portfolio's price impact over its fundamental risk. We develop the factor model of price impacts to empirically investigate the maximum-price-impact-ratio (MPIR) portfolio. For U.S. equity mutual fund flows, we find that the MPIR portfolio constructed using flows into Fama and French (1993) factors is a good choice.

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: Two Trading Desk Separation Theorem (May 2, 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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