IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v18y2008i18p1441-1450.html

Institutional flows and equity style diversification

Author

Listed:
  • John Gallo
  • Chanwit Phengpis
  • Peggy Swanson

Abstract

This article examines the composition of style-diversified portfolios and the influence of institutional trading on style performance over the period 1979 to 2004. We employ a methodology to identify possible cointegrating relationships among four equity styles and to determine styles necessary to a well-diversified portfolio. Two seemingly dissimilar styles, large value and small growth, are cointegrated and hence, redundant diversifiers. We show an optimized three-style portfolio that omits one cointegrated style, improves performance and lowers market risk, demonstrating the importance of allocation to style diversification. We also find evidence the trading behaviour of institutional investors explains, in part, the relationship among and between the cointegrated and the independent styles.

Suggested Citation

  • John Gallo & Chanwit Phengpis & Peggy Swanson, 2008. "Institutional flows and equity style diversification," Applied Financial Economics, Taylor & Francis Journals, vol. 18(18), pages 1441-1450.
    • Handle: RePEc:taf:apfiec:v:18:y:2008:i:18:p:1441-1450
    DOI: 10.1080/09603100701857914
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100701857914
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/09603100701857914?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. William N. Goetzmann & Massimo Massa, 2003. "Index Funds and Stock Market Growth," The Journal of Business, University of Chicago Press, vol. 76(1), pages 1-28, January.
    2. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    3. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. "Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, vol. 46(1), pages 75-109, March.
    4. Masih, Rumi & Masih, Abul M. M., 2001. "Long and short term dynamic causal transmission amongst international stock markets," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 563-587, August.
    5. Sadka, Ronnie, 2006. "Momentum and post-earnings-announcement drift anomalies: The role of liquidity risk," Journal of Financial Economics, Elsevier, vol. 80(2), pages 309-349, May.
    6. Cohen, Randolph B. & Gompers, Paul A. & Vuolteenaho, Tuomo, 2002. "Who underreacts to cash-flow news? evidence from trading between individuals and institutions," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 409-462.
    7. Sharpe, W F, 1981. "Decentralized Investment Management," Journal of Finance, American Finance Association, vol. 36(2), pages 217-234, May.
    8. Teo, Melvyn & Woo, Sung-Jun, 2004. "Style effects in the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 74(2), pages 367-398, November.
    9. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    10. Chen, Gong-meng & Firth, Michael & Meng Rui, Oliver, 2002. "Stock market linkages: Evidence from Latin America," Journal of Banking & Finance, Elsevier, vol. 26(6), pages 1113-1141, June.
    11. Angelos Kanas, 1998. "Linkages between the US and European equity markets: further evidence from cointegration tests," Applied Financial Economics, Taylor & Francis Journals, vol. 8(6), pages 607-614.
    12. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    13. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    14. Jobson, J D & Korkie, Bob M, 1981. "Performance Hypothesis Testing with the Sharpe and Treynor Measures," Journal of Finance, American Finance Association, vol. 36(4), pages 889-908, September.
    15. Tobias J. Moskowitz & Mark Grinblatt, 1999. "Do Industries Explain Momentum?," Journal of Finance, American Finance Association, vol. 54(4), pages 1249-1290, August.
    16. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    17. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-577, Sept.-Oct.
    18. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    19. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
    20. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    21. Fama, Eugene F & French, Kenneth R, 1995. "Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-155, March.
    22. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    23. Paul A. Gompers & Andrew Metrick, 2001. "Institutional Investors and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 229-259.
    24. Chen, Hsiu-Lang & De Bondt, Werner, 2004. "Style momentum within the S&P-500 index," Journal of Empirical Finance, Elsevier, vol. 11(4), pages 483-507, September.
    25. Warther, Vincent A., 1995. "Aggregate mutual fund flows and security returns," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 209-235.
    26. Tarbert, Heather, 1998. "The long-run diversification benefits available from investing across geographical regions and property type: evidence from cointegration tests1," Economic Modelling, Elsevier, vol. 15(1), pages 49-65, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Galla Salganik-Shoshan, 2016. "Investment flows: Retail versus institutional mutual funds," Journal of Asset Management, Palgrave Macmillan, vol. 17(1), pages 34-44, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. John Gallo & Chanwit Phengpis & Peggy Swanson, 2007. "Determinants of Equity Style," Journal of Financial Services Research, Springer;Western Finance Association, vol. 31(1), pages 33-51, February.
    2. John L. Glascock & Wikrom Prombutr & Ying Zhang & Tingyu Zhou, 2018. "Can Investors Hold More Real Estate? Evidence from Statistical Properties of Listed REIT versus Non-REIT Property Companies in the U.S," The Journal of Real Estate Finance and Economics, Springer, vol. 56(2), pages 274-302, February.
    3. John Gallo & Ying Zhang, 2010. "Global Property Market Diversification," The Journal of Real Estate Finance and Economics, Springer, vol. 41(4), pages 458-485, November.
    4. Paul Gallimore & J. Andrew Hansz & Wikrom Prombutr & Ying Zhang, 2014. "Long-term Cointegrative and Short-term Causal Relations among U.S. Real Estate Sectors," International Real Estate Review, Global Social Science Institute, vol. 17(3), pages 359-394.
    5. Paul Gallimore & J. Andrew Hansz & Wikrom Prombutr & Ying Zhang, 2014. "Long-term Cointegrative and Short-term Causal Relations among U.S. Real Estate Sectors," International Real Estate Review, Asian Real Estate Society, vol. 17(3), pages 359-394.
    6. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, December.
    7. Hung, Weifeng & Huang, Sheng-Tang & Lu, Chia-Chi & Liu, Nathan, 2015. "Trading behavior and stock returns in Japan," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 200-212.
    8. J. Andrew Hansz & Wikrom Prombutr & Ying Zhang & Tingyu Zhou, 2017. "An Anatomy of the Interrelationship between Equity and Mortgage REITs," International Real Estate Review, Global Social Science Institute, vol. 20(3), pages 287-324.
    9. Jiang, Hao, 2010. "Institutional investors, intangible information, and the book-to-market effect," Journal of Financial Economics, Elsevier, vol. 96(1), pages 98-126, April.
    10. Teo, Melvyn & Woo, Sung-Jun, 2004. "Style effects in the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 74(2), pages 367-398, November.
    11. Nobel Prize Committee, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    12. Black, Angela J. & Fraser, Patricia & McMillan, David G., 2007. "Are international value premiums driven by the same set of fundamentals?," International Review of Economics & Finance, Elsevier, vol. 16(1), pages 113-129.
    13. Phengpis, Chanwit & Swanson, Peggy E., 2004. "Increasing input information and realistically measuring potential diversification gains from international portfolio investments," Global Finance Journal, Elsevier, vol. 15(2), pages 197-217, August.
    14. Jiang, Xiaoquan & Lee, Bong-Soo, 2007. "Stock returns, dividend yield, and book-to-market ratio," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 455-475, February.
    15. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.
    16. Israel, Ronen & Moskowitz, Tobias J., 2013. "The role of shorting, firm size, and time on market anomalies," Journal of Financial Economics, Elsevier, vol. 108(2), pages 275-301.
    17. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
    18. John Gallo & Larry Lockwood & Ying Zhang, 2013. "Structuring global Property Portfolios: A Cointegration Approach," Journal of Real Estate Research, Taylor & Francis Journals, vol. 35(1), pages 53-82, January.
    19. Cooper, Michael J. & Gubellini, Stefano, 2011. "The critical role of conditioning information in determining if value is really riskier than growth," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 289-305, March.
    20. Cooper, Michael J. & Jackson, William III & Patterson, Gary A., 2003. "Evidence of predictability in the cross-section of bank stock returns," Journal of Banking & Finance, Elsevier, vol. 27(5), pages 817-850, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:18:y:2008:i:18:p:1441-1450. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.