{"id":25125,"date":"2023-06-20T14:13:46","date_gmt":"2023-06-20T12:13:46","guid":{"rendered":"https:\/\/quantpedia.com\/?p=25125"},"modified":"2025-06-04T14:04:45","modified_gmt":"2025-06-04T12:04:45","slug":"which-investors-drive-factor-returns","status":"publish","type":"post","link":"https:\/\/vvv.quantpedia.com\/es\/which-investors-drive-factor-returns\/","title":{"rendered":"Which Investors Drive Factor Returns?"},"content":{"rendered":"

If different investors share a common goal, why are there differences in strategy choices and portfolio characteristics across investor classes? Elsaify (2022) <\/a>attempts to provide an answer. In his study, he documents heterogeneity in investors\u2019 processing abilities, which is the key factor influencing investor\u2019s strategy choice and finds that such heterogeneity stems from factor timing<\/a> ability. <\/strong><\/p>\n\n\n\n

Elsaify (2022) first presents and then empirically supports a theoretical model of allocation problem, in which investors allocate their attention between \u201cfundamental\u201d and \u201cidiosyncratic\u201d component of an aggregate risk factor. Which component they give their relative attention to reflects whether they will pursue a factor selection or a factor timing strategy. While learning about fundamental (factor selection) is the focus of low capacity investors, investors with higher attention capacity zero in on learning about the idiosyncratic component (i.e. factor timing). Results of the study indicate that covariance between exposures and payoffs, portfolio dispersion and variance are all increasing in attention capacity. Furthermore, high capacity investors, i.e. investors with more precise price information, have greater impact on prices, increase price informativeness and thus reduce the volatility of factor returns. <\/strong><\/p>\n\n\n\n

In summary, different investors are equipped with different information processing abilities, which leads to variability in optimal information choice and, subsequently results in heterogeneity in portfolio section. According to the results, hedge funds seem to have the highest attention capacity, the most precise information and excel at factor timing. Their portfolios appear to be the most dispersed as well as most volatile. Moreover, demand system approach shows they exhibit the greatest per-dollar impact on asset prices. On the other hand, long-term investors (insurance companies and pension funds), brokers, and short-sellers exhibit low attention capacity because of their timing inability. They spend relatively more attention on the fundamental, their portfolios have the least dispersion and variance and their impact on factor returns is limited.<\/strong><\/p>\n\n\n\n

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