This paper explores institutional investor trades in stocks grouped by style and the relationship of these trades with equity market returns. It aggregates transactions drawn from a large universe of approximately $6 trillion of institutional funds. To analyze style behavior, we assign equities to deciles in each of five style dimensions: size, value/growth, cyclical/defensive, sector, and country. We find, first, strong evidence that investors organize and trade stocks across style-driven lines. This appears true for groupings both strongly and weakly related to fundamentals (e.g., industry or country groupings versus size or value/growth deciles). Second, the positive linkage between flows and returns emerges at daily frequencies, yet becomes even more important at lower frequencies. We show that quarterly decile flows and returns are even more strongly positively correlated than are daily flows and returns. However, as the horizon increases beyond a year, we find that the flow/return correlation declines. Third, style flows and returns are important components of individual stock expected returns. We find that nearby style inflows and returns positively forecast future returns while distant style inflows and returns forecast negatively. Fourth, we find strong correlations between style flows and temporary components of return. This suggests that behavioral theories may play a role in explaining the popularity and price impact of flow-related trading.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
10355.
Length: Date of creation: Mar 2004 Date of revision: Handle: RePEc:nbr:nberwo:10355
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Find related papers by JEL classification: G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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References listed on IDEAS 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.:
Barberis, Nicholas & Shleifer, Andrei, 2003.
"Style investing,"
Journal of Financial Economics,
Elsevier, vol. 68(2), pages 161-199, May.
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Nicholas Barberis & Andrei Shleifer, 2000.
"Style Investing,"
NBER Working Papers
8039, National Bureau of Economic Research, Inc.
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