Review of Financial Studies· 2026Q1
Correlated Demand Shocks and Asset Pricing
- 3citations
- Q1SCImago
- 2026year
Short summary
Institutional investors' correlated demand shocks, driven by incentives to outperform market indices, increase stock betas and risk premia, leading to higher capital costs and reduced firm investment.
AI-generated from the title and abstract; the full text is not read.
Key points
- Institutional investors' correlated demand shocks are a source of market risk.
- Incentives to outperform market indices drive procyclical, correlated risk-taking behavior.
- Elevated stock betas and risk premia result from correlated demand.
- Higher perceived cost of capital and reduced firm investment are consequences of this mechanism.
AI-generated from the title and abstract; the full text is not read.
Abstract
Abstract I propose a mechanism through which institutional investors’ correlated demand shocks provide a source of market risk in asset pricing. Institutional investors have mandates to beat a similar market index. During periods of strong stock market performance, their incentive to outperform intensifies as more of them fall short of the market index. This incentive induces procyclical risk-taking behavior, generating correlated demand that elevates the market betas and risk premia of exposed stocks. Quasi-experiments using exogenous changes in index membership support a causal interpretation of the mechanism. Elevated betas are associated with a higher perceived cost of capital and reduced firm investment. (JEL G1, G2)
The authors' abstract, as published at the source. Review of Financial Studies, 2026 · DOI ↗
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Field: Finance
FinanceEconomics, Econometrics and Finance