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Changing preferences as a source of stock return variation

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  • Winkler, Julian

Abstract

What can granular data on investors' asset demand tell us about stock return variation? Motivated by the recent literature on demand-based asset pricing, I model the growth rate of portfolio holdings based on evolving asset fundamentals by including demand for asset-specific characteristics in a portfolio optimisation function. Alongside changes in asset characteristics, investors re-allocate wealth according to their evolving demand elasticities. Using the model, I decompose the growth rate of mutual fund holdings by the effect of i) changing stock characteristics, ii) new preferences, and iii) latent demand. I aggregate these components to reconstruct the historical impact of mutual fund investments on stock returns, and find that changing preferences explain at least as much variation in stock prices as changes in fundamentals. This demonstrates the importance of studying heterogeneity in investor preferences, and their evolution, in furthering our understanding of stock market phenomena.

Suggested Citation

  • Winkler, Julian, 2024. "Changing preferences as a source of stock return variation," MPRA Paper 122802, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:122802
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    References listed on IDEAS

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    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • 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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