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Institutional investors and the limits of arbitrage

  • Lewellen, Jonathan
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    The returns and stock holdings of institutional investors from 1980 to 2007 provide little evidence of stock-picking skill. Institutions as a whole closely mimic the market portfolio, with pre-cost returns that have nearly perfect correlation with the value-weighted index and an insignificant CAPM alpha of 0.08% quarterly. Institutions also show little tendency to bet on any of the main characteristics known to predict stock returns, such as book-to-market, momentum, or accruals. While particular groups of institutions have modest stock-picking skill relative to the CAPM, their performance is almost entirely explained by the book-to-market and momentum effects in returns. Further, no group holds a portfolio that deviates efficiently from the market portfolio.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X11001358
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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 102 (2011)
    Issue (Month): 1 (October)
    Pages: 62-80

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    Handle: RePEc:eee:jfinec:v:102:y:2011:i:1:p:62-80
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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