Journal of Financial Economics Vol. 172 2025
Diversification driven demand for large stock
Abstract
I show that as a portfolio’s value concentration increases, actively managed portfolios predictably trim large positions, maintaining a level of practical diversification. This rebalancing channel is concentrated at thresholds implied by regulatory guidelines and by a fund’s own risk management histories. Since larger stocks are typically held widely and in large weights, they experience a coordinated contrarian trading demand that originates from this form of risk management. Diversification driven demand captures a novel return-reversal pattern in the large stock portfolios. Compensating this source of demand accentuates momentum returns during the modern sample period (1990 to 2022).
- DOI
- 10.1016/j.jfineco.2025.104109
- Volume
- 172
- Pages
- 104109
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref