Rewriting Expected Returns

The Essex Finance Centre (EFiC) warmly invites you to join the research seminar with Dr Xiao Han from Bayes Business School.

We develop an equilibrium framework that shows how investor flows can “rewrite returns” by re-pricing the cross-section of stocks. The model enforces market clearing and yields a transparent, near-closed-form approximation of how reallocations—both their source and destination—affect prices and expected returns.

We validate the framework against realised outcomes, finding a near one-to-one correspondence between model-implied price changes and empirically observed return effects, both in the full sample and in the quasi-experimental Morningstar rating reform of 2002. This validation demonstrates that the approximation is empirically well grounded and suitable for counterfactual analysis.

Applying the framework to value and momentum, we show that large reallocations from growth to value funds could eliminate the value premium while amplifying momentum, whereas equally sized inflows from households generate more muted effects. Because such extreme reallocations far exceed typical flow magnitudes, anomalies persist despite their fragility to capital crowding. The framework provides a tractable tool for stress-testing how capital flows reshape asset prices.