Zooming In on Equity Factor Crowding

Valerio Volpati (1) , Michael Benzaquen (2) , Zoltán Eisler , Iacopo Mastromatteo (3) , Bence Tóth , Jean-Philippe Bouchaud (4)

1 CEA - Commissariat à l'énergie atomique et aux énergies alternatives
2 LadHyX - Laboratoire d'hydrodynamique
3 SISSA / ISAS - Scuola Internazionale Superiore di Studi Avanzati / International School for Advanced Studies
4 CFM - Capital Fund Management

Crowding is most likely an important factor in the deterioration of strategy performance, the increase of trading costs and the development of systemic risk. We study the imprints of crowding on both anonymous market data and a large database of metaorders from institutional investors in the U.S. equity market. We propose direct metrics of crowding that capture the presence of investors contemporaneously trading the same stock in the same direction by looking at fluctuations of the imbalances of trades executed on the market. We identify significant signs of crowding in well known equity signals, such as Fama-French factors and especially Momentum. We show that the rebalancing of a Momentum portfolio can explain between 1-2% of order flow, and that this percentage has been significantly increasing in recent years.

Mots clés: crowding; equity factors; momentum; market microstructure

Domaines: Finance quantitative [q-fin.CP]

Valerio Volpati, Michael Benzaquen, Zoltán Eisler, Iacopo Mastromatteo, Bence Tóth, et al.. Zooming In on Equity Factor Crowding. The Journal of Risk, 2020, November 2020. ⟨hal-02567503⟩