Factor and Stock-Specific Disagreement and Trading Flows

Fotis Grigoris; Christian Heyerdahl-Larsen; Preetesh Kantak

doi:10.2139/ssrn.3966636

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Factor and Stock-Specific Disagreement and Trading Flows

Conference proceeding

Open access

Factor and Stock-Specific Disagreement and Trading Flows

Fotis Grigoris, Christian Heyerdahl-Larsen and Preetesh Kantak

Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2022

2022

DOI: 10.2139/ssrn.3966636

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Abstract

We study how disagreement on both factor and stock-specific risk exposures across many agents and securities impact asset prices. Our theoretical analyses predict that disagreement about factor dynamics drives larger flows into portfolios that are more exposed to the factors. Consequently, these concentrated bets on the factor lead to higher volatility and reduced diversification benefits. We then test these predictions using a novel empirical setting – exchange-traded funds (ETFs). We find that when factor disagreement rises, funds flow into the ETFs that mimic the factor. However, these increased flows induce high forward looking volatility of, and correlation risk within, the ETF

Disagreement

ETF

Lucas Orchard

Volatility and Correlation Risk

Details

Title: Subtitle: Factor and Stock-Specific Disagreement and Trading Flows
Creators: Fotis Grigoris
Christian Heyerdahl-Larsen
Preetesh Kantak
Resource Type: Conference proceeding
Publication Details: Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2022
DOI: 10.2139/ssrn.3966636
Publisher: SSRN
Number of pages: 79 pages
Language: English
Date published: 2022
Academic Unit: Finance
Record Identifier: 9984581220502771

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