Segmentation in Institutional Investment: Implications for Asset pricing factors and Performance Evaluation
We examine how IO segmentation influences pricing factors and find support for the demand-based asset pricing view (e.g., Koijen and Yogo, 2019, and Gompers and Metrick, 2001). Our evidence suggests that segmentation implies a constrained portfolio optimization and therefore impaired performance. Capacity frictions can lead to narrow investment opportunity sets, which limit money managers’ ability to take advantage of profitable opportunities outside their investment segment. In this respect, we construct pricing factors (i.e., IO factors) that are feasible (ex-ante) for institutions and benchmark their performance.
Presented in Virginia Tech BXBR Workshop, University of Illinois at Chicago, University of Technology Sydney, University of Sydney, Florida International University, Monash University, Deakin University, and Queensland University.