The Demand For Large Stocks

52 Pages Posted: 12 Dec 2022 Last revised: 29 Dec 2023

See all articles by Huaizhi Chen

Huaizhi Chen

University of Notre Dame - Department of Finance

Date Written: November 29, 2022

Abstract

Asset managers rebalance in response to return-driven changes in the composition of their portfolios. I show that this rebalancing channel predicts how mutual funds trade their largest positions. A 1% return driven increase in the weight of a single stock forecasts a 20.42% increase in the likelihood that a portfolio will decrease this position in the following quarter. Since the stocks that compose large positions tend to be held widely, few equity portfolios are available to absorb this predictable source of contrarian institutional demand. The large stock portfolios during the sample period (Q1 1990 to Q2 2021) exhibit 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

Suggested Citation

Chen, Huaizhi, The Demand For Large Stocks (November 29, 2022). Available at SSRN: https://ssrn.com/abstract=4288953 or http://dx.doi.org/10.2139/ssrn.4288953

Huaizhi Chen (Contact Author)

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

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