Institutional Ownership Enhances Macro Factor Returns

Investor Heterogeneity and Factor Pricing

AuthorsGrace Xing Hu; Zhao Jin; Jianfeng Yu

Paper linkhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=4046898

The strategy trades NYSE, AMEX, and NASDAQ stocks using 11 macro factors and institutional ownership data. Stocks are ranked by factor betas and residual institutional ownership, then sorted into quintiles to construct long-short portfolios, equally-weighted and rebalanced quarterly.

Institutions behave as rational, risk-averse investors, pricing macro-related risks while ignoring mispricing captured by characteristic factors. High residual institutional ownership stocks show strong return premiums due to investor heterogeneity, reflecting the interplay of risk and mispricing.