Asset Prices and Institutional Investors
AbstractEmpirical evidence indicates that trades by institutional investors have sizable effects on asset prices, generating phenomena such as index effects, asset-class effects and others. It is difficult to explain such phenomena within standard representative-agent asset pricing models. In this paper, we consider an economy populated by institutional investors alongside standard retail investors. Institutions care about their performance relative to a certain index. Our framework is tractable, admitting exact closed-form expressions, and produces the following analytical results. We find that institutions optimally tilt their portfolios towards stocks that comprise their benchmark index. The resulting price pressure boosts index stocks, while leaving nonindex stocks unaffected. By demanding a higher fraction of risky stocks than retail investors, institutions amplify the index stock volatilities and aggregate stock market volatility, and give rise to countercyclical Sharpe ratios. Trades by institutions induce excess correlations among stocks that belong to their benchmark index, generating an asset-class effect.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9120.
Date of creation: Sep 2012
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G29 - Financial Economics - - Financial Institutions and Services - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-09 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bengt Holmstrom, 1979.
"Moral Hazard and Observability,"
Bell Journal of Economics,
The RAND Corporation, vol. 10(1), pages 74-91, Spring.
- Dimitri Vayanos & Paul Woolley, 2008.
"An Institutional Theory of Momentum and Reversal,"
FMG Discussion Papers
dp621, Financial Markets Group.
- Vayanos, Dimitri & Woolley, Paul, 2008. "An Institutional Theory of Momentum and Reversal," CEPR Discussion Papers 7068, C.E.P.R. Discussion Papers.
- Dimitri Vayanos & Paul Woolley, 2011. "An institutional Theory of Momentum and Reversal," FMG Discussion Papers dp666, Financial Markets Group.
- Dimitri Vayanos & Paul Woolley, 2008. "An Institutional Theory of Momentum and Reversal," NBER Working Papers 14523, National Bureau of Economic Research, Inc.
- Agarwal, Vikas & Gómez, Juan-Pedro & Priestley, Richard, 2012.
"Management compensation and market timing under portfolio constraints,"
CFR Working Papers
11-16 [rev.], University of Cologne, Centre for Financial Research (CFR).
- Agarwal, Vikas & Gómez, Juan-Pedro & Priestley, Richard, 2012. "Management compensation and market timing under portfolio constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1600-1625.
- Agarwal, Vikas & Gómez, Juan-Pedro & Priestley, Richard, 2011. "Management compensation and market timing under portfolio constraints," CFR Working Papers 11-16, University of Cologne, Centre for Financial Research (CFR).
- Sévi, Benoît & Le Pen, Yannick & Chevallier, Julien & Bunn, Derek, 2013. "Fundamental and Financial Influences on the Co-movement of Oil and Gas Prices," Economics Papers from University Paris Dauphine 123456789/11692, Paris Dauphine University.
- Péter Kondor & Ron Kaniel, 2011.
"The delegated Lucas tree,"
2011 Meeting Papers
580, Society for Economic Dynamics.
- Dimitri Vayanos & Paul Woolley, 2011. "Fund Flows and Asset Prices: A Baseline Model," FMG Discussion Papers dp667, Financial Markets Group.
- Ben-David, Itzhak & Franzoni, Francesco & Moussawi, Rabih, 2011. "ETFs, Arbitrage, and Contagion," Working Paper Series 2011-20, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- Gaston Gelos, 2011. "International Mutual Funds, Capital Flow Volatility, and Contagion-A Survey," IMF Working Papers 11/92, International Monetary Fund.
- Alessandro Borin & Virginia Di Nino, 2012. "The role of financial investments in agricultural commodity derivatives markets," Temi di discussione (Economic working papers) 849, Bank of Italy, Economic Research and International Relations Area.
- Maria Grith & Wolfgang Karl Härdle & Volker Krätschmer, 2013. "Reference Dependent Preferences and the EPK Puzzle," SFB 649 Discussion Papers SFB649DP2013-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.