Which Investors Drive Anomaly Returns and How?

The origins of asset pricing anomalies have long been a highly debated puzzle in financial economics. We provide new evidence on the sources of anomalies by linking the variation in anomaly returns to investor demand. The demand for stock fundamentals accounts for 38% of the variation, while uninformed demand shocks contribute another 38%. Flow-induced trading explains only 12% of the variation. The impact of demand from households and small institutions is particularly strong, whereas the effects of large institutions are far less significant. Our results indicate that most of the variation in anomaly returns cannot be attributed to stock fundamentals or fund flows, thereby challenging both the risk-based theories and models of institutional frictions.

Keywords: Demand-based, Factor Investing, Anomalies, Institutional Investors, Portfolio Choice.

JEL Classification: G11, G12, G23.

Suggested Citation: Suggested Citation

Tamoni, Andrea and Sokolinski, Stanislav and Li, Yizhang, Which Investors Drive Anomaly Returns and How? (August 1, 2023). Available at SSRN: https://ssrn.com/abstract=4242745 or http://dx.doi.org/10.2139/ssrn.4242745