The strategy trades NYSE, AMEX, and NASDAQ stocks, exploiting style concentration (H) by going long on high-inattention stocks and short on low-inattention stocks, rebalanced quarterly.
ASSET CLASS: stocks | REGION: United States | FREQUENCY: Monthly | MARKET: equities | KEYWORD: Style, Concentration
I. STRATEGY IN A NUTSHELL
Trades NYSE, AMEX, and NASDAQ stocks with complete ownership data. Measures style inattention via the Herfindahl index (Hi,q). Long high-inattention decile, short low-inattention decile. Equally weighted, rebalanced quarterly.
II. ECONOMIC RATIONALE
High style concentration (H) predicts higher future returns, reflecting either a risk premium or mispricing corrected over time. Long-short portfolios based on H deliver robust, consistent alpha beyond known systematic factors.
III. SOURCE PAPER
Style Concentration in Ownership and Expected Stock Returns[Click to Open PDF]
Gikas A. Hardouvelis and Georgios Karalas. University of Piraeus; Centre for Economic Policy Research (CEPR). University Carlos III of Madrid.
<Abstract>
We examine the relation of expected stock returns with fund style concentration in stock ownership over the period 1997-2015. Concentration is measured by the Herfindahl index H of the shares of different investment styles in the ownership of stocks and represents a measure of investor inattention in stocks. Decile portfolios on H reveal a strong positive association of H with future returns, with the long-short portfolio on H having significant alphas after passing through the five-factor Fama-French (2015) model.
The econometric results confirm the positive association and are robust to the inclusion of known risk-factors as determinants of expected stock returns, the returns of the investment styles themselves, plus a set of style-related control variables and other liquidity, size, or volatility characteristics of stocks. The relation coexists with short-run price and style momentum and long-run style and price reversals of Barberis and Shleifer (2003) and remains present over multi-year horizons of stock returns, being both economically and statistically significant.
The results are consistent with the model of Merton (1987), which claims a stock’s excess risk premium over the CAPM premium, is the product of investor participation (which is proxied by H in our framework), idiosyncratic volatility and size. These results also shed light on the small firm effect.
IV. BACKTEST PERFORMANCE
| Annualised Return | 9.82% |
| Volatility | 12.26% |
| Beta | N/A |
| Sharpe Ratio | 0.47 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
