Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-15T05:52:34.551Z Has data issue: false hasContentIssue false
  • English
  • Français

Style Investing and Institutional Investors

Published online by Cambridge University Press:  06 April 2009

Kenneth Froot  and
Melvyn Teo
Get access Rights & Permissions [Opens in a new window]

Abstract

This Paper explores the importance and price implications of style investing by institutional investors in the stock market. To analyze styles, we assign stocks to deciles or segments across three style dimensions: size, value/growth, and sector. we find strong evidence that institutional investors reallocate and sector. We find strong evidence that institutional investors reallocate across style groupings more intensively than across random stock groupings. In addition, we show that own segment style inflows and refurns positively forecast future stock returns, which distant segament style inflows and returns forecast negatively. We argue that behavioral theories play a role in explaining these results.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 4 , December 2008 , pp. 883 - 906
Copyright
Copyright © School of Business Administration, University of Washington 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Asness, C.; Krail, R.; and Liew, J.. “Style Timing: Value and Growth.” Journal of Portfolio Management, 23 (2000), 79–87.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Inverstor Sentiment and the Cross-Section of Stock Returns.” Journal of Finance, 61 (2006), 1645–1680.CrossRefGoogle Scholar
Banz, R.W.. “The Relationship between Return and Market Value of Common Stocks.” Journal of Financial Economics, 9 (1981), 3–18.CrossRefGoogle Scholar
Barberis, N., and Shleifer, A..“Style Investing.” Journal of Financial Economics, 68 (2003), 161–199.CrossRefGoogle Scholar
Barberis, N.; Shleifer, A.; and Wurgler, J.. “Comovement.” Journal Economics, 75 (2005), 283–318.Google Scholar
Brennan, M. J., and Cao, H. H.. “International Portfolio Investment Flows.” Journal of Finance, 52 (1997), 1851–1880.CrossRefGoogle Scholar
Brown, S., and Goetzmann, W.. “Mutual Fund Styles.” Journal of Financial Economics, 43 (1997), 373–399.CrossRefGoogle Scholar
Campbell, J.“ A Variance Decomposition for Stock Returns.” Economic Journal 101 (1991), 157–179.CrossRefGoogle Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chen, H., and Bondt, W. F. M. De. “Style Momentum within the S&P 500 Index.” Journal of Empirical Finance, 11 (2004), 483–507.CrossRefGoogle Scholar
Cohen, R.; Gompers, P.; and Vuolteenaho, T. “Who Underreacts to Cash-Flow News? Evidence from Trading between Individuals and Institutions.” Journal of Financial Economics, 66 (2000), 409–462.CrossRefGoogle Scholar
Cooper, M.; Dimitrov, O. and Rau, P.R.. “A Rose.Com by Any Other Name.” Journal of Finance, 56 (2001), 2371–2388.CrossRefGoogle Scholar
B., Delong J.; Shleifer, A.; summers, L.H.; and Waldmann, R.J.. “Noise Trader Risk in Financial Markets.” Journal of Political Economy, 98 (1990), 703–738.Google Scholar
Fama, E., and French, K.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1977), 427–465.Google Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E., and French, K.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.CrossRefGoogle Scholar
Froot, K.; O'Connell, P.G.J.; and Seasholes, M.. “The Portfolio Flows of International Investors.” Journal of Financial Economics, 60 (2005), 1535–1566.Google Scholar
Gompers, P., and Metrick, A.. “Institutional Investors and Equity Prices.” Quarterly Journal of Economics, 116 (2001), 229–260.CrossRefGoogle Scholar
Haugen, R.A., and Baker, N. L.. “Commonality in the Determinants of Expected Stock Returns.” Journal of Financial Economics, 41 (1996), 401–439.CrossRefGoogle Scholar
Hong, H.; Lim, T.; and Baker, J.. “Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies.” Journal of Finance, 55 (2000), 265–295.CrossRefGoogle Scholar
Jegadeesh, N., and Titman, S.. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finances, 48 (1993), 65–91.CrossRefGoogle Scholar
Kumar, A. “Style Switching and Stock Returns” Working paper, University of Texas at Austin (2006).Google Scholar
Kyle, A. “Continuous Actions and Insider Trading.” Econometrica, 53 (1985), 1315–1336.CrossRefGoogle Scholar
Lo, A., and Macakinlay, C. “Stock Prices Do Not Follow Random Walks: Evidence from a simple Specification Test.” Review of Financial Studies, 1 (1988), 41–66.CrossRefGoogle Scholar
Mitchell, M., and Stafford, E.. “Managerial Decisions and Long-Term Stock Price Performance.” Journal of Business, 73 (2000), 287–329.CrossRefGoogle Scholar
Nofsinger, J. R., and Sias, R. W.. “Herding and Feedback Trading by Institutional and Individual Investors.” Journal of Finance, 54 (1999), 2263–2295.CrossRefGoogle Scholar
Teo, M., and Woo, S. “Style Effects in the Cross-Section of Stock Returns.” Journal of Financial Economics, 74 (2004), 367–398.CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817–838.CrossRefGoogle Scholar