Correlated Demand Shocks and Asset Pricing

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ID: 337573
2026
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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)
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Authors Byungwook Kim
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Journal review of financial studies
Year 2026
DOI
10.1093/rfs/hhag094
URL
https://doi.org/10.1093/rfs/hhag094
Keywords Keywords not found

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