Institutional Investors, Heterogeneous Benchmarks and the Comovement of Asset Prices

Download or read book Institutional Investors, Heterogeneous Benchmarks and the Comovement of Asset Prices written by Andrea M. Buffa and published by . This book was released on 2018 with total page 65 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the equilibrium implications of a multi-asset economy in which asset managers are subject to different benchmarks, and demonstrate how heterogeneous benchmarking generates a mechanism through which fundamental shocks propagate across assets. Fluctuations in asset managers' capital invested for benchmarking purposes, scaled by the size of the economy, induce price pressure that can result in negative spillovers across asset returns. We highlight the economic significance of these benchmarking-induced spillovers by analyzing shock elasticities and cross-elasticities of price-dividend ratios, and characterize a rich structure of asset price comovements within and across benchmarks. Heterogeneous benchmarking also induces return predictability, generating both reversal and momentum.