Who are he senmen raders? Evdence from he cross-secon of sock reurns and demand Aprl 26 2014 Luke DeVaul Rchard Sas and Laura Sarks ABSTRACT Recen work suggess ha senmen raders shf from less volale o speculave socks when senmen ncreases. Gven ha he marke clearng condon requres a buyer for every seller we explo hese cross-seconal paerns and changes n share ownershp o es wheher nvesor senmen mercs capure nsuonal or ndvdual nvesors demand shocks. In conras o heorecal assumpons and common percepons we fnd no evdence ha ndvdual nvesors radng s responsble for senmen nduced demand shocks and msprcng. If he commonly used senmen mercs ruly capure nvesor senmen hen nsuonal nvesors are he senmen raders whose demand shocks drve prces from value. DeVaul s from he Deparmen of Fnance Eller College of Managemen Unversy of Arzona Tucson Arzona 85721; ldevaul@emal.arzona.edu. Sas s from Deparmen of Fnance Eller College of Managemen Unversy of Arzona Tucson Arzona 85721 (520) 621-3462 sas@eller.arzona.edu. Sarks s from he Deparmen of Fnance McCombs School of Busness Unversy of Texas a Ausn Ausn Texas 78712 (512) 471-5899 lsarks@mal.uexas.edu. We hank semnar parcpans a he Unversy of Arzona he 2013 European Fnance Assocaon Meengs Kelvn Law Charles Lee and Jeff Wurgler for her helpful commens. We hank Jeff Wurgler and Ken French for provdng daa. Copyrgh 2014 by he auhors.
Who are he senmen raders? Evdence from he cross-secon of sock reurns and demand There s smply no reason o beleve ha nsuonal nvesors are less subjec o socal nfluences on opnon han oher nvesors and here are subsanal grounds for hnkng ha hey may be even more so. (Fredman 1984) A burgeonng heorecal and emprcal leraure poss ha demand shocks by unnformed senmen raders mpac secury prces whch has mporan mplcaons for boh asse prcng and corporae fnance. 1 Despe he near unversal assumpon ha as a group rraonal ndvdual nvesors are he source of senmen-based demand shocks capured by senmen mercs whle nsuons are smar-money raonal nvesors we demonsrae ha commonly-used measures of nvesor senmen capure nsuonal nvesors raher han ndvdual nvesors demand shocks. 2 Assumng hese mercs capure nvesor senmen hen nsuonal nvesors raher han ndvduals are he senmen raders who drve msprcngs. Our emprcal analyses buld upon he recen nsgh ha nvesor senmen has boh crossseconal and me-seres mplcaons. Specfcally Baker and Wurgler (henceforh BW) (2006 2007) propose ha secures wh hghly subjecve valuaons are more suscepble o he vagares of senmen. Conssen wh her hypohess hey show ha hgh volaly socks dsplay a srong posve relaon beween he BW merc for changes n nvesor senmen and conemporaneous sock reurns whle low volaly sock reurns move nversely wh conemporaneous changes n 1 See for example he May 2012 specal ssue of he Journal of Fnancal Economcs devoed o nvesor senmen. 2 See for example Shller (2000) De Long Shlefer Summers and Waldmann (1990a1990b) Lee Shlefer and Thaler (1991) Nagel (2005) Barbers and Xong (2012) and Sambaugh Yu and Yuan (2012a). Moreover Baker and Wurgler (2007 p. 136) noe The nexperenced real or ndvdual nvesor s more lkely han he professonal o be subjec o senmen. A few early heorecal models however sugges nsuonal nvesors may engage n nose radng because clens canno fully dsngush nose radng from nformed radng (e.g. Allen and Goron (1993) Dow and Goron (1997) and Trueman (1988)). Beyond he nroducory quoe from (Fredman (1984)) very lle work poss ha nsuonal nvesors would be more suscepble o senmen han ndvdual nvesors. Brown and Clff (2004) argue ha her evdence suggess ha he sronges relaon beween senmen and conemporaneous marke aggregae reurns occurs n large socks usng surveys of nsuons as measures of senmen. Hrbar and McInns (2012) repor ha analyss forecass for speculave socks end o be more opmsc when senmen levels are hgh conssen wh he hypohess ha a leas one group of sophscaed nvesors (analyss) are mpaced by senmen. 1
senmen. 3 Tha s senmen beas are posve for speculave socks and negave for safe socks. The auhors also fnd speculave socks end o underperform safe socks followng hgh senmen levels bu ouperform safe socks followng low senmen levels. They conclude ha he combned resuls are conssen wh he hypohess ha senmen raders demand shocks mpac prces and resul n pushng speculave socks valuaons oo hgh relave o he valuaons of safe socks when senmen s hgh (and oo low when senmen s low). The nvesor senmen hypohess s a demand shock sory requres changes n demand (.e. n he words of BW (2007 p. 131) senmen-based demand shocks ) and fne demand and supply elasces. 4 Tha s demand shocks mply ne buyng or sellng by senmen raders whch resuls n changes n her ownershp levels. Moreover because he marke clearng condon requres a buyer for every seller senmen raders ne demand shocks mus be offse by supply from raders who are less subjec o changes n senmen. For ease of exposon we denoe hese laer raders as lqudy raders. Of course a leas some of he lqudy raders supply may be movaed by fundamenal radng e.g. sellng overvalued speculave socks o senmen raders when senmen ncreases. I s hese wo nsghs from he senmen leraure senmen raders demand shocks mus be offse by lqudy raders supply and speculave socks have posve senmen beas whle safe socks have negave senmen beas ha drve our prmary approach o denfyng he senmen raders. Specfcally changes n senmen wll be posvely relaed o changes n senmen raders demand for speculave socks and nversely relaed o her demand shocks for safe socks. An ncrease n senmen for example causes senmen raders o purchase rsky socks and sell safe 3 BW (2006 2007) propose ha greaer lms o arbrage for speculave socks (relave o safe socks) also conrbues o speculave socks larger senmen beas. We dscuss hs pon n greaer deal below. 4 In mos senmen models marke frcons (e.g. shor sale resrcons ransacon coss capal consrans or nose rader rsk) keep raonal speculaors from mmedaely correcng msprcng (see for example Mller (1977) DeLong Shlefer Summers and Waldmann (1990a) and Shlefer and Vshney (1997)). 2
socks.e. her buyng and sellng her demand shocks are he drvers of he msprcng n he senmen leraure. Our key resuls reveal ha f he BW senmen mercs ndeed capure nvesor senmen hen nsuonal nvesors (n aggregae) raher han ndvdual nvesors are he senmen raders ha drve senmen nduced msprcng. Beyond our resuls focusng on nsuonal and ndvdual nvesors demand shocks we provde furher suppor for our hypohess ha nsuonal nvesors mus be drvng any senmen radng by examnng he relaon beween senmen levels and nsuonal and ndvdual nvesors ownershp levels of speculave and safe socks. 5 If he senmen mercs capure nsuonal nvesor demand hen we should fnd ha hese nvesors ownershp levels (.e. he fracon of shares held by nsuons) of speculave socks relave o her ownershp levels of safe socks are hgher when senmen levels are hgher. Our resuls suppor hs mplcaon whch also mples ha hgh nvesor senmen levels are assocaed wh (relavely) lower ndvdual nvesor ownershp levels of speculave socks. We conduc a number of robusness ess ha connue o suppor he hypohess ha senmen mercs capure nnovaons n nsuonal raher han ndvdual nvesors (drec) demand. Frs alhough we focus on he BW senmen merc because s he domnan measure n recen research on senmen we fnd smlar resuls usng consumer confdence measures as an alernave proxy for senmen. 6 5 We focus on nsuonal and ndvdual nvesors demand shocks and changes n senmen because boh nsuonal nvesors ownershp levels and senmen levels are hghly perssen whch can lead o problems n nference (see Yule (1926) Granger and Newbold (1974) Ferson Sarkssan and Smn (2003) and Novy-Marx (2012)). Our ess based on changes n senmen (and changes n nsuonal/ndvdual nvesor ownershp) largely avod hs ssue. 6 For research usng he BW merc see for example Anonou Doukas and Subrahmanyam (2013) Rosch Subrahmanyam and van Djk (2013) Moskowz Oo and Pedersen (2012) Karoly Lee and van Djk (2012) Ramadora (2012) Hrbar and McInns (2012) McLean and Zhao (2012) Novy-Marx (2012) and Sambaugh Yu and Yuan (2012a 2012b) Baker Wurgler and Yuan (2012) and Yu and Yuan (2011). For research usng he consumer confdence see for nsance Fsher and Saman (2003) Lemmon and Pornaguna (2006) Bergman and Roychowdhury (2008) and Schmelng (2009). 3
Second only one of he componens of he BW senmen measure he dvdend premum has mplcaons for he cross-secon of secures. Specfcally BW (2004 2006 2007) pos a rse n senmen causes senmen raders o ncrease her demand for speculave non-dvdend payng socks and decrease her demand for safe dvdend payng socks resulng n a declne n he dvdend premum. A drec mplcaon of our hypohess ha senmen mercs capure nsuonal nvesors demand shocks s ha hese nvesors should also be ncreasng her demand for speculave non-dvdend payng socks when senmen s rsng. We fnd evdence conssen wh hs mplcaon because changes n he dvdend premum are posvely relaed o nsuonal nvesors demand shocks. Tha s he dvdend premum ncreases when nsuons buy dvdend payng socks from ndvdual nvesors and sell non-dvdend payng socks o ndvdual nvesors. We presen addonal analyses n whch we examne poenal explanaons for why nvesor senmen mercs capure nsuonal raher han ndvdual nvesor demand shocks. 7 Frs we examne wo prevously proffered raonales for ceran ypes of nsuons o rade on senmen. In parcular hedge funds have been consdered he nvesor ype mos lkely o aemp o prof from rdng bubbles n asse prces (e.g. Brunnermeer and Nagel (2004)) and ndependen nvesmen advsors and muual funds have been consdered he nsuons mos lkely o have repuaonal concerns ha could lead hem o rade on senmen. Thus we evaluae he relaon beween senmen and nsuonal demand shocks by nsuonal ype (hedge funds muual funds ndependen nvesmen advsors and oher nsuons) o examne hese wo fundamenal hypoheses. Our analyses do no suppor he bubble rdng explanaon bu do suppor he repuaonal concern explanaon. Specfcally he relaon beween me-seres varaon n hedge funds aracon o speculave socks and changes n senmen s relavely small and no 7 We acknowledge ha n hs analyss we are operang under he assumpon ha he BW merc does ndeed capure nvesor senmen. An alernave nerpreaon s ha senmen mercs do no capure nvesor senmen. We dscuss hs possbly n he las secon. 4
meanngfully dfferen from zero bu conssen wh he hypohess ha repuaonal concerns play a role n drvng nsuonal senmen radng changes n senmen are srongly relaed o meseres varaons n muual funds and ndependen advsors aracon o rsky secures. An alernave explanaon for our resul ha nsuonal nvesors are drvng he relaon beween senmen demand shocks and speculave socks s ha hese demand shocks are drven prmarly by he underlyng nvesors eher nsuonal or ndvdual. Thus we examne wheher underlyng nvesor flows can explan he relaon beween nsuons and senmen. 8 Followng he mehod n Grffn Harrs Shu and Topaloglu (2011) we paron 13(f) nsuonal nvesors rades no managers decsons and flow-nduced rades. We fnd he relaon beween me-seres varaon n nsuonal demand shocks for rsky socks and changes n senmen o be prmarly drven by managers decsons. In conras we fnd no evdence ha nvesor flows o and from 13(f) nsuons can explan he nsuons senmen radng. Furher conssen wh he hypohess ha managers decsons prmarly drve nsuonal senmen radng we demonsrae ha 13(f) nsuons enry and ex rades (whch by defnon are due o manager decsons) are also srongly relaed o changes n senmen. I s possble ha nvesor flow-nduced rades are more lkely o appear n muual fund radng. Thus we furher nvesgae he role of nvesor flows n explanng nsuonal senmen radng by usng he Thomson Fnancal/CRSP muual fund daa. Conssen wh he ess usng he 13(f) daa we documen a srong posve relaon beween me-seres varaon n aggregae muual fund demand shocks for speculave socks and changes n senmen. We fnd ha alhough muual fund managers decsons accoun for he majory of he relaon beween muual fund demand shocks 8 A large leraure fnds he muual fund nvesors chase muual fund reurns bu he relaon s no symmerc good performance yelds srong nflows whle bad performance yelds mnmal ouflows (e.g. Ippolo (1992) Goezmann and Peles (1997) Srr and Tufano (1998)). Smlarly a number of sudes (e.g. Del Guerco and Tkac (2002) Hesler Knel Neumann and Sewar (2009) and Goyal and Wahal (2008)) fnd ha defned benef penson plan sponsors also chase reurns. 5
and changes n senmen flows o muual funds accoun for an esmaed approxmaely 40% of he relaon (margnally sascally sgnfcan a he 10% level). Noneheless overall our evdence suggess ha managers decsons raher han nvesor flows plays he key role n drvng nsuonal senmen radng. Thrd alhough he relaon beween changes n senmen and nsuonal demand shocks mples ha n aggregae nsuons engage n senmen radng mos radng s beween nsuons (raher han beween nsuons and ndvdual nvesors) as nsuons accoun for he vas majory of radng. 9 Snce every senmen nduced rade mus be offse by a rader less subjec o senmen s lkely ha some nsuons rade wh senmen whle oher nsuons provde much of he necessary lqudy o offse her demand even f nsuons n aggregae rade wh senmen. To examne hs ssue we paron nsuons no hose ha posvely conrbue o our measure of aggregae nsuonal senmen radng and hose ha provde lqudy o senmen raders (.e. conrbue negavely o our measure of aggregae nsuonal senmen radng). Conssen wh our prevous resuls we fnd ha he majory (57%) of nsuons can be classfed as senmen raders whle he remanng 43% would be consdered lqudy raders under he classfcaon. Thus alhough he evdence shows ha mos nsuons (and nsuons n aggregae) rade on senmen he pracce s far from unversal. Fourh heory suggess ha senmen raders rade excessvely. 10 Thus f he relaon beween nsuonal demand shocks and senmen resuls from nsuons radng on senmen we expec ha hose nsuons mos subjec o senmen wll exhb hgher urnover han oher nsuons. Conssen wh he heorecal mplcaons hose nsuons who conrbue mos srongly o our 9 Esmaes sugges ha nsuonal nvesors have long accouned for 70-96% of radng volume (e.g. Schwarz and Shapro (1992) Jones and Lpson (2005)) 10 Overconfdence leads o excessve radng (e.g. Odean (1998) Benos (1998)) and senmen s a form of overconfdence (Danel Hrshlefer and Subrahmanyam (1998)). 6
measure of aggregae nsuonal senmen radng average hgher urnover han he nsuons ha mos offse he senmen radng (or he more passve managers). In sum assumng he mercs capure nvesor senmen our resuls suppor he hypohess nsuonal nvesors (n aggregae) raher han ndvdual nvesors are he senmen raders ha drve senmen-nduced msprcng. Moreover alhough nramanager flows (e.g. nvesors shfng money from a speculave Janus fund o a safe Janus fund) may play some role n drvng nsuonal senmen radng nsuonal nvesors decsons play he prmary role. 1. Daa A. Invesor senmen BW defne her nvesor senmen measure as he frs prncpal componen of sx commonly employed proxes for nvesor senmen durng a perod: he level of closed-end fund dscouns he NYSE share urnover he number of IPOs he average frs day reurn for he IPOs he share of equy ssues n oal deb and equy ssues and he dfference beween he average marke-o-book raos for dvdend payers versus nonpayers (whch s ermed he dvdend premum). 11 BW defne a second proxy ermed orhogonalzed senmen whch s compued as he frs prncpal componen of he resduals from regressons of each of he sx senmen proxes on a se of varables relaed o busness cycles: growh n ndusral producon growh n consumer durables nondurables and servces and a dummy varable for NBER recessons. Analogously he auhors measure he change (boh raw and orhogonalzed) n nvesor senmen as he frs prncpal componen of changes n he sx proxes. 12 Because our demand 11 See BW (2006) for a dealed dscusson of he sx ndvdual senmen proxes. 12 Because BW measure changes n senmen as he frs prncpal componen of changes n he proxes raher han he change n he frs prncpal componen of he proxes he BW change-n-senmen measure s no equal o he changes n her senmen levels ndex (see BW (2007) foonoe 6 for addonal deal). The auhors pon ou ha dfferen proxes have dfferen levels of nosness when movng from levels o changes. A proxy for nsance may have low error n s levels daa (and herefore an mporan role n he senmen levels ndex) bu hgher error n s changes (and 7
mercs are based on quarerly holdngs we compue he quarerly change n nvesor senmen as he sum of he monhly BW change n senmen (boh raw and orhogonalzed) merc over he quarer. 13 B. Sock nsuonal ownershp and muual fund daa We lm he sample o ordnary secures (share code 10 or 11) and followng BW (2007) use reurn volaly as he measure of a sock s speculave naure. 14 Specfcally a he begnnng of each quarer we compue he monhly reurn volaly over he prevous 12 monhs (for socks wh a leas nne monhly reurns n he pror year). We use nsuonal nvesors quarerly 13(f) repors o measure nsuonal and ndvdual nvesors aggregae demand for each sock-quarer beween 1980 and 2010. 15 For each securyquarer we measure nsuonal ownershp levels as he fracon of ousandng shares held by nsuonal nvesors and he nsuonal demand shock as he change n he fracon of shares held by nsuonal nvesors over he quarer. 16 Followng prevous work we assume ha he negave of nsuonal demand shocks proxes for ndvdual nvesors demand shocks. 17 If for example IBM s aggregae 13(f) nsuonal ownershp moves from 60% o 65% hen he nsuonal demand shock s 5% and he ndvdual nvesor demand shock s -5%. herefore a less mporan role n he senmen change ndex). In addon BW (2006 2007) allow boh lag and conemporaneous values (dependng on whch works beer) of he sx senmen proxes n formng he prncpal componen for senmen levels. BW s changes n senmen merc however s based only on conemporaneous values. 13 In unabluaed analyss we repea our prmary ess based on quarerly (raw and orhongalzed) changes n senmen compued from he frs prncpal componen of he quarerly changes n he sx underlyng seres. Our conclusons reman unchanged. 14 In Appendx A we repea our prmary ess usng four alernave defnons of a sock s speculave naure (sze age wheher he sock pays a dvdend and wheher he company has posve earnngs). Our conclusons reman unchanged. 15 Snce 1980 regulaon requres hose nvesors wh more han $100 mllon under managemen (n 13(f) secures) o dsclose her end-of-calendar quarer posons (greaer han $200000 or 10000 shares) whn 45 days of quarer-end. 16 Followng Yan and Zhang (2009) we exclude observaons where repored nsuonal ownershp exceeds 100% of shares ousandng (abou 1% of observaons). 17 See for example Gompers and Merck (2001) Cohen Gompers and Vuoleenaho (2002) Gbson Safeddne and Son (2004) San (2010) Cho and Sas (2012). 8
The 13(f) daa are however only a proxy for nsuonal nvesor ownershp levels as small nsuons (e.g. less han $100 mllon n 13(f) secures) and small posons (less han $200000 and 10000 shares) are excluded. Moreover a few nsuons are somemes able o fle confdenal repors wh he SEC (ha do no show up n he Thomson Reuers/WRDs 13(f) daa). 18 We use wo sources for he 13(f) manager classfcaon daa. Frs we use he Type classfcaons mananed by Bran Bushee o denfy muual funds (Type=3) and ndependen nvesmen advsors (Type=4). 19 Second our sample of hedge funds s based on a propreary Thomson Fnancal daase ha denfes all hedge fund companes flng 13(f) repors (see Reca Sas and Turle (2014) for deals regardng hs daa). All remanng nsuons (e.g. banks nsurance companes foundaons nernally managed penson funds ec.) are classfed as ohers. We merge (usng WRDs MFlnks) Thomson Fnancal N-30D and CRSP muual fund daa o form he muual fund sample. Our muual fund sample consrucon (deals gven n Appendx B) follows Grffn Harrs Shu and Topaloglu (2011) and Ben-Davd Franzon and Moussaw (2012). Analogous o nsuonal demand shocks we defne he aggregae muual fund demand shock for secury n quarer as he change n he fracon secury s shares held by muual funds over quarer. We requre secures o have a leas fve 13(f) nsuonal owners a he begnnng or end of he quarer o ensure an adequae proxy for nsuonal/ndvdual nvesor demand levels and shocks. 20 The number of secures n our sample averages 3953 socks each quarer (rangng from 18 Ths s a relavely small group. Agarwal Jang Tang and Yang (2013) repor ha here are only 3.37 confdenal repors per 100 13(f) repors. Moreover hese confdenal repors accoun for less han 14% of he reporng nsuon s posons. 19 The ype codes from he Thomson Fnancal 13(f) daa avalable on WRDs are no relable afer 1998. Bran Bushee has aken relable pre-1998 codes and carred hem forward. In addon he hand-classfes managers ha ener he daabase afer 1998. Professor Bushee s nsuonal classfcaon daa are avalable on hs webse: hp://acc.wharon.upenn.edu/faculy/bushee/iiclass.hml. 20 As noed above nsuons are no requred o repor holdngs less han 10000 shares and $200000. As a resul we canno be ceran ha 13(f) daa adequaely proxes for nsuonal ownershp levels/demand shocks for socks wh 9
1711 o 5537) beween June 1980 and December 2010 (n=123 quarers). Table 1 repors he meseres average of he cross-seconal descrpve sascs for our sample. The medan frm has 34% of s shares held by nsuonal nvesors and 32 nsuons radng s sock durng he quarer. Because he average raw change n he fracon of shares held by nsuons s posve (reflecng he growh n nsuonal ownershp over me) for ease of nerpreaon we henceforh defne he nsuonal demand shock as he raw change n nsuonal ownershp for frm n quarer less he mean change n he fracon of shares held by nsuons across all socks n quarer. 21 [Inser Table 1 abou here] 2. Emprcal resuls We begn by confrmng he BW (2007) fndngs (based on monhly daa from 1966-2005) ha: (1) hgh volaly socks exhb larger senmen beas han low volaly socks and (2) hgh volaly socks end o underperform (ouperform) low volaly socks followng hgh (low) senmen levels holds for our quarerly daa from 1980-2010. 22 Specfcally we form volaly decles (based on NYSE breakpons) a he begnnng of each quarer and compue he equalweghed reurn for secures whn each volaly decle porfolo. We hen esmae me-seres regressons of quarerly porfolo reurns on he value-weghed marke porfolo and he (raw or orhogonalzed) quarerly senmen change ndex. Conssen wh BW (2007) he resuls (dealed n Appendx A) sugges ha an ncrease n senmen causes senmen raders o sell safe socks and buy rsky socks and hese senmen nduced demand shocks mpac prces.e. hgh volaly socks very low levels of nsuonal ownershp. Frms wh less han fve nsuonal shareholders accoun for on average less han 0.07% of marke capalzaon. 21 Because he same consan s subraced from all frms (whn a quarer) sascs compued from dfferences (e.g. he mean change for hgh volaly socks less he mean change for low volaly socks) are no mpaced. Smlarly cross-seconal correlaons (e.g. Table 5) are no mpaced by hs de-meanng. 22 Because he 13f daa s only avalable begnnng n December 1979 we canno nclude he earler BW sample years n our sample. 10
have posve senmen beas low volaly socks have negave senmen beas and he dfference n senmen beas s sascally meanngful. 23 As furher dealed n Appendx A we also confrm ha senmen levels are nversely relaed o he subsequen reurn dfference for hgh and low volaly socks e.g. hgh volaly socks underperform low volaly socks followng hgh senmen levels. In sum alhough based on a dfferen sample perod and perodcy our resuls are fully conssen wh BW and Baker Wurgler and Yuan (2012). A. Changes n senmen and nsuonal/ndvdual nvesor demand shocks We begn our examnaon of he relaon beween changes n senmen and nsuonal/ ndvdual nvesor demand shocks by compung he cross-seconal mean nsuonal demand shock for secures whn each volaly decle. We hen calculae he me-seres correlaon beween changes n senmen and he conemporaneous quarerly cross-seconal average nsuonal demand shocks (or equvalenly ndvdual nvesors supply shocks) for each volaly porfolo. 24 23 As noed n foonoe 4 BW (2006 2007) pon ou ha speculave socks also have greaer sensvy o changes n senmen because hey are harder o arbrage. One could propose herefore ha low volaly socks may experence larger shfs n ownershp by senmen raders (bu smaller assocaed reurn shocks) han hgh volaly socks. For nsance assumng boh low and hgh volaly sock had posve senmen beas an ncrease n senmen could heorecally cause senmen raders o purchase more shares of low volaly socks (because lqudy raders may provde many shares n hese easy o arbrage socks) han hgh volaly socks. However BW (2007) demonsrae (and we confrm) ha low volaly socks have negave senmen beas and hgh volaly socks have posve senmen beas. As a resul (assumng as he senmen leraure proposes hese reurn paerns are drven by demand shocks nduced by changes n senmen) an ncrease n senmen s assocaed wh senmen raders buyng hgh volaly socks from lqudy raders and sellng low volaly socks o lqudy raders. Tha s he dfferen sgns on he hgh and low volaly porfolos senmen beas are nconssen wh he explanaon ha dfferences n arbrage coss accoun for he relaons beween nsuonal nvesors demand shocks and changes n senmen for low and hgh volaly socks. 24 We recognze ha oher facors may nfluence nsuonal or ndvdual nvesors demand shocks. Because our goal s o deermne whose demand shocks are capured by hese senmen mercs (e.g. who buys hgh volaly socks when senmen ncreases regardless of wheher oher facors nfluence hose decsons) we purposely do no conrol for oher facors. 11
The resuls repored n Table 2 reveal he paern n nsuonal nvesor demand shocks and conemporaneous reurns maches he paern n changes n senmen and conemporaneous reurns. When senmen ncreases nsuons buy hgh volaly socks from ndvdual nvesors (.e. he correlaon beween me-seres varaon n nsuonal demand shocks for hgh volaly socks and changes n orhogonal senmen s 31.8%) and sell low volaly socks o ndvdual nvesors (.e. he correlaon beween me-seres varaon n nsuonal demand shocks for low volaly socks and changes n orhogonal senmen s -29.1%). As shown n he las column of Table 2 he correlaons beween he dfference n nsuonal demand shocks for hgh and low volaly socks and changes n senmen s meanngfully posve (sascally sgnfcan a he 1% level) usng eher raw or orhogonal changes n senmen. [Inser Table 2] In sum nsuonal nvesors buy volale socks from and sell safe socks o ndvdual nvesors when senmen ncreases. Tha s nsuonal demand shocks move wh and ndvdual nvesors demand shocks move couner o changes n senmen for hgh volaly socks. Furher jus as s he case for reurns he relaon s reversed for low volaly socks. The resuls are conssen wh he hypohess ha he BW merc capures nsuonal raher han ndvdual nvesors demand shocks. B. Senmen levels and nsuonal/ndvdual nvesor ownershp levels If senmen mercs capure he demand of nsuonal raher han ndvdual nvesors (as Table 2 suggess) hen nsuonal ownershp levels for hgh volaly socks relave o her ownershp levels for low volaly socks should be hgher when senmen levels are hgher. 25 Because 25 In a workng paper we were no aware of when begnnng our sudy Cornell Landsman and Subben (2011) examne changes n nsuonal ownershp (.e. nsuonal demand shocks) followng hgh senmen levels and fnd ha nsuonal nvesors end o buy speculave socks and sell safe socks followng hgh senmen levels. Alhough boh 12
nsuonal ownershp grows subsanally hroughou hs perod (see for example Blume and Kem (2011)) we derend nsuonal ownershp levels (by regressng mean nsuonal ownershp levels for each volaly porfolo on me) and compue he mean (derended) nsuonal ownershp level (.e. he fracon of shares held by nsuons) across socks whn each volaly decle a he begnnng of each quarer. 26 We hen paron he sample no low (below medan) and hgh begnnng of quarer senmen level perods and compue he me-seres mean of he crossseconal average derended nsuonal ownershp levels for socks whn each volaly decle durng hgh and low senmen perods. Panels A and B n Table 3 repor he mean derended ownershp level whn each volaly porfolo durng hgh and low senmen and orhogonal senmen perods respecvely. Because he average derended ownershp level s zero by defnon (.e. s a regresson resdual) he mean value across hgh and low senmen perods (for each volaly porfolo) s zero. 27 The ess repored n he fnal column of he able show ha derended nsuonal ownershp levels for hgh volaly socks relave o her ownershp levels for low volaly socks are greaer when senmen s hgh usng eher he raw or orhogonalzed senmen levels. A resul ha s sascally sgnfcan a he 1% level. In sum he levels analyss (Table 3) s conssen wh he demand shock analyss (Table 2). Boh ess suppor he hypohess ha nsuons raher han ndvdual nvesors are he senmen raders capured by he BW merc. [Inser Table 3 abou here] sudes examne nsuonal ownershp and senmen we dffer boh emprcally and heorecally. Appendx C provdes a full dscusson and addonal ess. 26 In Appendx A we repea hese ess whou derendng nsuonal ownershp levels and fnd smlar resuls. 27 The sum does no add exacly o zero because our sample conans an odd number of quarers (123). Specfcally gven 61 low senmen quarers and 62 hgh senmen quarers 61/123*(low senmen value) + 62/123*(hgh senmen value) = 0. 13
C. An alernave es Tme-seres varaon n nsuonal demand for volale socks and senmen Alhough he above ess suppor he argumen ha nsuonal (raher han ndvdual) nvesors demand shocks are encapsulaed by senmen mercs hese ess focus on me-seres varaon n cross-seconal averages n he exreme volaly decles. To broaden our resuls we consruc an alernave es ha uses all of he sample secures. We begn by compung he crossseconal correlaon (across all secures n our sample) each quarer beween nsuonal demand shocks and secures reurn volaly (measured over he prevous 12 monhs). 28 Panel A n Table 4 repors he me-seres descrpve sascs he cross-seconal correlaon averages 2.15%. The correlaon however vares subsanally over me fallng as low as -15.19% and rsng as hgh as 17.99%. Thus alhough on average nsuons end o buy volale socks (or equvalenly ndvdual nvesors end o sell volale socks) he paern vares subsanally over me. [Inser Table 4 abou here] Panel B n Table 4 repors he me-seres correlaon beween changes n senmen and varaon n nsuonal demand shocks for rsky socks as measured by me-seres varaon n he cross-seconal correlaon beween nsuonal demand shocks and reurn volaly (.e. he crossseconal correlaons summarzed n Panel A). Tha s we es f nsuonal nvesors ncrease her preference for rsky socks (and decrease her preference for safe socks) when senmen ncreases. Conssen wh our earler ess he resuls reveal he correlaon beween me-seres varaon n nsuons aracon o volale socks and changes n senmen s 37.81% based on raw changes n senmen and 36.69% based on orhogonalzed changes n senmen (sascally sgnfcan a he 1% level n boh cases). Equvalenly he correlaon beween orhogonal changes n senmen and me-seres varaon n ndvdual nvesors aracon o volale socks s -36.69%. 28 Followng BW (2006) we wnsorze reurn volaly a he 0.5% and 99.5% levels each quarer. 14
D. Consumer confdence speculave socks and nsuonal versus ndvdual nvesor demand Alhough he BW merc s he domnan senmen measure n recen research a number of sudes have used consumer confdence as an alernave nvesor senmen proxy. 29 Thus we nex examne he relaon beween nsuonal demand shocks for rsky socks and changes n consumer confdence. We focus on wo measures of consumer confdence he Unversy of Mchgan Survey of Consumer Expecaons and he Conference Board Consumer Confdence Index. Boh are based on monhly surveys (over our sample perod) o households askng for her vews on curren and fuure economc condons (see Lemmon and Pornaguna (2006) for a dealed dscusson of boh surveys). We begn by examnng wheher consumer confdence senmen beas dffer for hgh and low volaly socks. 30 Specfcally we regress he equal-weghed porfolo reurns for he hghes and lowes volaly decles on he conemporaneous marke reurn and he sandardzed (.e. rescaled o un varance zero mean) conemporaneous change n consumer confdence. The resuls repored n Panel A of Table 5 reveal ha hgh volaly socks end o ouperform low volaly socks when he Mchgan Consumer Confdence ncreases (sascally sgnfcan a he 1% level). Alhough he dfference n senmen beas s n he forecased drecon (.e. hgher for hgh volaly socks) s no maerally dfferen from zero for changes n he Conference Board ndex. [Inser Table 5 abou here] Assumng changes n consumer confdence proxy for changes n senmen he resuls n Panel A sugges conssen wh he BW merc ha senmen raders ncrease her demand for 29 See for example Fsher and Saman (2003) Lemmon and Pornaguna (2006) Bergman and Roychowdhury (2008) and Schmelng (2009). See Lemmon and Pornaguna (2006) for dscusson of he smlares and dfferences beween he Baker and Wurgler (2006 2007) merc and he consumer confdence mercs. 30 In unabulaed analyss we fnd ha: (1) quarerly changes n boh consumer confdence ndces are posvely relaed o conemporaneous changes n he raw or orhogonal BW senmen merc (all correlaons dffer meanngfully from zero a he 5% level or beer) and (2) he relaon beween consumer confdence levels and he dfference n subsequen reurns for hgh and low volaly socks s meanngfully negave (sascally sgnfcan a he 1% level n boh cases).e. hgh volaly socks end o underperform low volaly socks followng hgh consumer confdence levels. 15
speculave socks when senmen ncreases. Thus we nex repea he ess examnng he relaon beween me-seres varaon n changes n nsuons demand for speculave socks and changes n senmen bu use changes n consumer confdence (raher han he BW merc) as he senmen proxy. Specfcally we compue he me-seres correlaon beween changes n consumer confdence and me-seres varaon n nsuons aracon o volale socks (as capured by he crossseconal correlaons beween nsuonal demand shocks and reurn volaly summarzed n Panel A of Table 4). Resul repored n Panel B of Table 5 reveal ha nsuons ncrease her preference for volale socks when senmen ncreases (sascally sgnfcan a he 1% level n boh cases). Thus once agan he resuls sugges ha senmen mercs capure nsuons raher han ndvdual nvesors demand shocks. E. Insuonal demand and he dvdend premum BW use sx senmen proxes o form her senmen ndces. One of he sx proxes he dvdend premum s compued drecly from he cross-secon of secures and herefore has drec mplcaons for he cross-secon of secures. Specfcally based on earler work (BW (2004)) he auhors propose ha senmen raders ncrease her demand for non-dvdend payng socks relave o dvdend payng socks when senmen ncreases. Accordng o he senmen hypohess hese senmen nduced demand shocks resul n he valuaon of non-dvdend payng socks rsng relave o he valuaon of dvdend payng socks when senmen ncreases. As a resul he dvdend premum measured as he naural logarhm of he dfference n he average marke-o-book rao for dvdend payng socks and he marke-o-book rao for non-dvdend payng socks falls when senmen ncreases. Because hs measure s derved from he cross-secon of secures leads o anoher drec es of whose demand shocks are capured by changes n hs senmen proxy. Specfcally f an ncrease 16
n senmen causes a declne n he dvdend premum as a resul of senmen raders demand shocks (as BW (2004 2006 2007) conend) hen he dfference beween senmen raders demand shocks for dvdend payng socks and non-dvdend payng socks wll be posvely correlaed wh changes n he dvdend premum. For nsance an ncrease n senmen causes senmen raders o sell dvdend payng socks o and buy non-dvdend payng socks from lqudy raders resulng n a declne n he dvdend premum. To examne hs ssue we dvde secures no wo groups hose ha pad a dvdend n he prevous 12 monhs and hose ha dd no. Each quarer we compue he cross-seconal average nsuonal demand shock for dvdend payers and non-payers as well as her dfference. 31 We nex examne whose demand shocks for dvdend payng and non-dvdend payng socks are posvely correlaed wh quarerly changes n BW s raw or orhogonal dvdend premum senmen varable. Table 6 repors he me-seres correlaons beween he changes n he dvdend premum and he dfferences n he average nsuonal demand shock for dvdend payers and non-payers. The resuls reveal a srong posve relaon he correlaon s 42% and sascally sgnfcan a he 1% level. We fnd nearly dencal resuls based on orhogonalzed changes n he dvdend premum. In shor he dvdend premum ncreases when nsuonal nvesors buy dvdend payng socks from and sell non-dvdend payng socks o ndvdual nvesors. If senmen raders demand shocks drve me-seres varaon n he dvdend premum hen nsuonal nvesors raher han ndvdual nvesors are he senmen raders. [Inser Table 6 abou here] 31 Followng BW (2004) we exclude fnancals (SIC codes 6000 hrough 6999) ules (SIC codes 4900 hrough 4949) frms wh book equy less han $250000 and frms wh asses less han $500000 from he dvdend premum analyss. 17
3. Wha drves he relaon beween nsuons and senmen? Our analyss demonsraes ha senmen mercs capure nsuons raher han ndvdual nvesors demand shocks. In hs secon we furher examne he relaon beween nsuons and senmen o beer undersand he facors ha may drve hese relaons. A. Analyss by nvesor ype Two poenal canddaes o explan nsuonal senmen radng are ha: (1) nsuons aemp o rde bubbles o explo less sophscaed nvesors and (2) nsuons rade on senmen o preserve repuaon. In hs secon we nvesgae hese possbles by evaluang he relaon beween senmen and nsuons by he ype of nsuon. Frs we propose (as mananed by Brunnermeer and Nagel (2004) and Grffn Harrs Shu and Topaloglu (2011)) ha hedge funds relave o oher nsuonal ypes are he mos lkely nsuonal ype o aemp o rde bubbles. Thus f such behavor conrbues meanngfully o he relaon beween nsuons and senmen we expec o documen a srong posve relaon beween changes n senmen and hedge funds aracon o volale socks. Alhough he dea of profably rdng a bubble appears a leas nally sraghforward (e.g. a smar nvesor buyng NASDAQ a he begnnng of 2000 earns a 25% gan over he nex 70 days f she sells a he marke peak on March 10 2000) he marke clearng condon sll requres ha someone mus offse hese rades. Tha s f boh senmen raders and raonal speculaors buy speculave socks some hrd group of raders mus sell speculave socks. 32 The key akeaway s 32 The leraure akes several approaches o solvng hs ssue. DeLong Shlefer Summers and Waldmann (1990b) model hree nvesor classes passve nvesors nformed raonal speculaors and posve feedback raders. The passve nvesors provde he lqudy o raonal speculaors and raonal speculaors are allowed o rade pror o rraonal feedback raders. Alernavely n he Abreu and Brunermeer (2003) model raonal arbrageurs sell overvalued shares o rraonally exuberan behavoral raders. However a gven raonal manager may no sell all shares nally (even f he manager beleves he shares are overvalued) because he manager has a chance o earn a hgher reurn by aempng o sell laer n he bubble (bu pror o s bursng). Noe ha n he Abreu and Brunermeer 18
ha no all raders can smulaneously cause he bubble. If ndvdual nvesors senmen nduced demand shocks drve msprcng hen as a group nsuonal nvesors mus provde he necessary lqudy even f some smar nsuons aemp o rde he bubble. In oher words f ndvdual nvesors aggregae senmen nduced demand shocks drve msprcng nsuonal nvesors (n aggregae) mus sell speculave socks o and buy safe socks from ndvdual nvesors (n aggregae) when senmen ncreases. 33 Second s possble ha nsuonal clens percepons are nfluenced by senmen. As a resul nsuons may fear hey wll lose clens (or fal o gan addonal clens) f hey fal o rade on senmen. Specfcally nsuonal nvesors ulmaely nves on behalf of ndvduals. Thus hey answer o her frm s board or hose who delegae porfolo managemen o hem such as penson fund boards foundaon boards ndvdual nvesors and her consulans responsble for selecng and reanng her servces. If he percepons of he ndvduals o whom nsuonal nvesors answer are nfluenced by senmen a raonal nsuonal nvesor wll ac accordngly or face ermnaon and declnng revenue. A number of sudes formally model such repuaonal radng (e.g. Scharfsen and Sen (1990) Graham (1999) Dasgupa Pra and Verardo (2011a)). In a recen leer o clens legendary nvesor and GMO founder Jeremy Granham (2012) succncly descrbes he problem: The cenral ruh of he nvesmen busness s ha nvesor behavor s drven by career rsk The prme drecve as Keynes knew so well s frs and las o keep your job To preven hs calamy professonal nvesors pay ruhless aenon o wha oher nvesors n general are dong. The grea majory go wh he flow eher compleely or parally. Mssng a model raonal arbrageurs rade agans senmen (.e. hey do provde he lqudy o offse senmen raders demand shocks) jus no as aggressvely as hey would n he absence of marke frcons. 33 I s heorecally possble nsuonal and ndvdual nvesors are equally lkely o be senmen raders. Thus ndvdual (or nsuonal) nvesors would be equally lkely o rade on senmen as offse senmen raders demand and changes n nsuonal/ndvdual nvesor ownershp would be ndependen of changes n senmen. Anoher possbly s ha all nvesors are subjec o senmen. Under hs scenaro an ncrease n senmen would ncrease he value of a speculave sock bu would no resul n radng e.g. f he sock s nal value was $1 and he senmen shock caused all nvesors o se a new reservaon prce of $2 he prce would mmedaely adjus o $2 and no radng would occur snce no nvesor would be wllng o sell he sock for less han $2. 19
bg move however unjusfed may be by fundamenals s o ake a very hgh rsk of beng fred. Followng prevous work (e.g. Sas (2004) and Dasgupa Pra and Verardo (2011b)) we propose ha muual funds and ndependen advsors wll be mos concerned abou repuaon. In sum f nsuons aempng o rde bubbles largely drves he relaon beween senmen and nsuons we expec a srong relaon beween changes n senmen and hedge fund demand shocks. Analogously f repuaonal concerns prmarly drve nsuonal senmen radng hen he relaon beween changes n senmen and demand shocks by boh muual funds and ndependen advsors should be especally srong. To es how he relaon beween nsuonal demand and senmen vares by nvesor ype we repea he examnaon of wheher me-seres varaon n nsuonal demand for volale socks s relaed o changes n senmen (.e. he analyss n Table 4) for each nvesor ype. Analogous o our aggregae analyss for each nsuonal nvesor ype we lm he sample o secures ha are held by a leas fve nvesors of ha ype a eher he begnnng or end of he quarer. For muual funds ndependen nvesmen advsors and oher nsuons he cross-seconal sample averages 2582 secures each quarer (rangng from 355 socks for muual funds n June 1980 o 4694 socks for ohers n Sepember 1998). Because here are relavely few hedge companes n our sample a he begnnng of he perod we lm he hedge fund sample o he fnal 90 quarers. 34 As before (see Panel A of Table 4) each quarer we compue he cross-seconal correlaon beween nsuonal demand shocks (by each ype of nsuonal nvesor as measured by he change n he fracon of shares held by ha ype of nsuon) and sock reurn volaly. As shown n Panel A of Table 7 all four manager ypes exhb on average a posve relaon beween demand shocks and reurn 34 Pror o Sepember 1998 each quarer has less han 100 socks ha are held by a leas fve 13(f) hedge fund companes. The hedge fund sample sze n he fnal 90 quarers averages 1220 secures/quarer (rangng from 89 n December 1989 o 2769 n December 2006). 20
volaly. As wh aggregae nsuonal demand (Panel A of Table 4) however he cross-seconal correlaon vares grealy over me for each of he four manager ypes. [Inser Table 7 abou here] Panel B (analogous o Panel B n Table 4) repors he key es he correlaon beween changes n senmen and me seres varaon n each ype of managers aracon o speculave socks (as capured by he cross-seconal correlaons summarzed n Panel A). The resuls reveal srong evdence ha muual funds and ndependen advsors ncrease her demand for rsky socks when senmen ncreases. Specfcally he correlaons for muual funds and ndependen advsors range from 32% (ndependen advsors and orhogonal changes senmen) o 43% (ndependen advsors and raw changes n senmen). In conras alhough he pon esmaes are posve he relaons beween me-seres varaon n hedge funds or oher nsuons demand shocks for volale socks and changes are senmen s no sascally sgnfcan. The lack of a meanngful relaon beween senmen and me seres varaon n hedge funds aracon o volale socks n Table 7 suggess ha nsuons aempng o rde bubbles s no he prmary facor drvng he relaon beween changes n senmen and nsuonal demand shocks. The Table 7 resuls however provde some suppor for he hypohess ha nsuons repuaonal concerns conrbue o nsuonal senmen radng.e. hose nvesors who are arguably mos concerned abou repuaonal effecs (muual funds and ndependen advsors) exhb he greaes propensy for senmen radng. B. Flows ne acve buyng and passve rades Anoher possble scenaro s ha senmen nduced underlyng nvesor flows drve aggregae nsuonal senmen radng. An ncrease n senmen for nsance may cause underlyng 21
nvesors o shf funds from more conservave nsuons o more aggressve nsuons and as a resul nsuons n aggregae sell safe socks and purchase rsky socks. To explore hs possbly we follow he mehod n Grffn Harrs Shu and Topaloglu (2011) and esmae hree componens (deals are gven n Appendx B) of nsuonal demand shocks: rades ha resul from nvesor flows (NBFlows) rades ha resul from manager s decsons (Ne Acve Buyng) and rades ha resul from renvesed dvdends (Passve). Specfcally denong he change n he fracon of secury s shares held by nsuons n quarer as ΔIns : K K K K k k k k 1 k 1 k 1 k 1 Ins Ins NBFlows Ne Acve Buyng Passve (1) where K s he number of nsuons radng secury n quarer. Because covarances are lnear n he argumens and aggregae nsuonal demand s he sum of he hree componens he meseres correlaon beween nsuons aracon o volale socks (as capured by he crossseconal correlaon beween nsuonal nvesors demand shocks and volaly) and changes n senmen (.e. he correlaon repored n Panel B of Table 4) can be paroned no hree componens (see Appendx B for proof) he poron due o flow nduced demand shocks he poron due o ne acve buyng and he poron due o passve rades. Recognze however ha because 13(f) daa are aggregaed across a gven manager s porfolos (e.g. Janus fles one 13(f) repor for all Janus funds) our esmae of 13(f) flow nduced rades are effecvely nermanager flows (e.g. flows from Janus o Blackrock) raher han nramanager flows (e.g. flows from one Janus fund o a dfferen Janus fund). The frs column of Panel A n Table 8 repors he correlaon beween me-seres varaon n nsuons demand for rsky socks and orhogonal changes n senmen.e. he 36.69% fgure repored n Panel B of Table 4. The las hree columns n Panel A repor he poron of he correlaon due o nvesor flows (ne buyng flows) manager decsons (ne acve buyng) and k 22
renvesed dvdends (passve). The p-values repored n he las hree columns are based on boosrapped esmaes wh 10000 eraons (see Appendx B for deals). The resuls n Panel A reveal lle evdence ha nermanager flows play a meanngful role n drvng he relaon beween nsuonal demand shocks and changes n senmen. Raher he resuls reveal ha managers decsons (.e. ne acve buyng) drve he relaon beween nsuonal demand shocks and senmen accounng for 96% of he me-seres correlaon repored n he frs column (.e. 0.3514/0.3669). 35 [Inser Table 8 abou here] Because our measure of 13(f) flows s based on each nsuons aggregae porfolo s possble ha a gven nsuon s ne acve buyng reflecs nramanager flows. Assume for example Janus fund A holds 100% of her porfolo n Apple and Janus fund B holds 50% of her porfolo n GM and 50% n Apple. An nvesor hen moves $100 from Janus fund B o Janus fund A. If boh managers do no change porfolo weghs (.e. manager B sells $50 of Apple and $50 of GM; manager A purchases $100 of Apple) Janus aggregae porfolo wegh for GM wll declne and her aggregae wegh for Apple wll ncrease. As a resul he ne acve buyng (compued a he 13(f) level) may reflec a leas n par flows whn an nsuon. To nvesgae hs possbly we recalculae aggregae nsuonal demand shocks usng only enry and ex rades. Tha s nsuonal demand shocks compued only from hose manager/sock/quarer observaons where a manager eners a secury hey dd no hold a he begnnng of he quarer or compleely lqudaes a poson n a secury hey held a he begnnng of he quarer. By defnon hese enry/ex rades are due o manager decsons (e.g. an enry rade canno arse from a fund nvesng flows no her exsng porfolo). Specfcally for each 35 In Appendx A we repea hese ess by 13(f) nvesor ype. For muual funds and ndependen nvesmen advsors (.e. he wo nvesor ypes wh a meanngful correlaons n he frs column) he relaon beween me-seres varaon n her demand shocks for rsky socks and changes n senmen s drven by managers decsons (sascally sgnfcan a he 1% level n boh cases) and no nermanager flows. 23
secury quarer we compue he nsuonal demand shock due only o nsuonal enry and ex rades. Nex analogous o he fgures repored n Panel A of Table 4 we compue he crossseconal correlaon beween aggregae nsuonal enry/ex demand shocks and secures reurn volaly each quarer (hese fgures average 0.98% and range from -12.75% o 14.62%). We hen calculae he me-seres correlaon beween nsuons enry/ex demand shocks for rsky socks and orhogonal changes n senmen. Panel B n Table 8 reveals he correlaon s 47.89% (sascally sgnfcan a he 1% level). The resuls provde furher evdence ha managers decsons play an mporan role n drvng he relaon beween me-seres varaon n nsuons demand shocks for volale socks and changes n senmen. As a fnal es we use he merged Thomson Fnancal/CRSP daa and paron each muual fund s demand no hree componens flow nduced demand shocks ne acve buyng and passve demand (see Appendx B for deals). Because we use he muual fund daa hese esmaes are a he fund level and herefore capure flows beween funds n he same famly. Panel C n Table 8 repors he correlaon beween changes n senmen and me-seres varaon n muual fund demand shocks for volale socks (as capured by he cross-seconal correlaon beween muual fund demand shocks and sock volaly) s 33.18% (sascally sgnfcan a he 1% level). 36 Thus conssen wh our resuls based on 13(f) daa muual funds buy rsky socks/sell safe socks when senmen ncreases. The nex hree columns n Panel C paron he Thomson Fnancal/CRSP muual fund correlaon no he hree componens and reveal ha alhough manager s decsons (ne acve buyng) accoun for he larges share of he correlaon (sascally sgnfcan a he 5% level based on boosrapped p-values) nvesor flows o muual funds accoun for a large componen of he 36 For conssency we lm he sample o socks ha are held by a leas fve muual funds a he begnnng and end of he quarer. The sample sze averages 2052 socks per quarer. Noe ha Panel C n Table 8 s based on he CRSP/TFN muual fund daa whle he muual fund analyss n Table 7 s based on 13(f) daa and he Bushee nvesor ype classfcaons. 24