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Elephants in Equity Markets

Author

Listed:
  • Hélène Rey
  • Adrien Rousset Planat
  • Vania Stavrakeva
  • Jenny Tang

Abstract

We introduce a novel empirical market-clearing–based decomposition of equity price growth. Using sample holdings covering only an average of 6% of market capitalization, we account for, on average, 88% of time variation in over 22,000 individual stock prices and 95% of fluctuations in 33 aggregate stock indices. Changes in portfolio weights contribute most to the variance of individual stock prices, while “safe haven” markets feature strong cross-stock substitution patterns that leave aggregate portfolio weight changes uncorrelated with aggregate indices. Equity markets are global and exchange rates play a key equilibrating role. We find that the behavior of active funds’ portfolio managers has a causal effect on stock prices by transmitting firm-specific news. Similarly, final funds’ investors play a key role in transmitting macroeconomic and risk aversion news to stock prices.

Suggested Citation

  • Hélène Rey & Adrien Rousset Planat & Vania Stavrakeva & Jenny Tang, 2024. "Elephants in Equity Markets," NBER Working Papers 32756, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32756
    Note: AP IFM
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    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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