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Diversification driven demand for large stock

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  • Chen, Huaizhi

Abstract

I show that as a portfolio’s value concentration increases, actively managed portfolios predictably trim large positions, maintaining a level of practical diversification. This rebalancing channel is concentrated at thresholds implied by regulatory guidelines and by a fund’s own risk management histories. Since larger stocks are typically held widely and in large weights, they experience a coordinated contrarian trading demand that originates from this form of risk management. Diversification driven demand captures a novel return-reversal pattern in the large stock portfolios. Compensating this source of demand accentuates momentum returns during the modern sample period (1990 to 2022).

Suggested Citation

  • Chen, Huaizhi, 2025. "Diversification driven demand for large stock," Journal of Financial Economics, Elsevier, vol. 172(C).
  • Handle: RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001175
    DOI: 10.1016/j.jfineco.2025.104109
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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