The Demand For Large Stocks

Abstract

I demonstrate that the preference by asset managers to diversify stocks and follow certain investment mandates result in forecastable contrarian trading on their largest positions. Since large-cap stocks are held in similar positions across most asset managers, few equity portfolios are available to to absorb this predictable source of demand. The large stock portfolios during the sample period (Q1 1990 to Q2 2021) exhibits a novel return-reversal pattern that is consistent with this demand channel. A variable that forecasts this source of demand for large stocks can explain return reversals in the momentum portfolios formed from the largest US companies.

Keywords: Momentum, Mutual Funds, Portfolio Management, Price Pressure, Reversal, Risk Management, Stock Demand

JEL Classification: G10, G11, G14, G40, and G41