Abstract

http://ssrn.com/abstract=1305671
 
 

References (42)



 
 

Citations (37)



 


 



An Institutional Theory of Momentum and Reversal


Dimitri Vayanos


London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Paul Woolley


London School of Economics

August 2, 2010

AFA 2010 Atlanta Meetings Paper

Abstract:     
We propose a rational theory of momentum and reversal based on delegated portfolio management. An investor can hold assets through an index or an active fund. Investing in the active fund involves a time-varying cost, interpreted as managerial perk or ability. The investor responds to an increase in the cost by flowing out of the active and into the index fund. While prices of assets held by the active fund drop in anticipation of these outflows, the drop is expected to continue, leading to momentum. Because outflows push prices below fundamental values, expected returns eventually rise, leading to reversal. Besides momentum and reversal, fund flows generate comovement, lead-lag effects and amplification, with all effects being larger for assets with high idiosyncratic risk. The active-fund manager's concern with commercial risk makes prices more volatile.

Number of Pages in PDF File: 79

Keywords: asset pricing, delegated portfolio management, momentum, reversal

JEL Classification: D5, D8, G1

working papers series


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Date posted: November 23, 2008 ; Last revised: August 10, 2010

Suggested Citation

Vayanos, Dimitri and Woolley, Paul, An Institutional Theory of Momentum and Reversal (August 2, 2010). AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1305671 or http://dx.doi.org/10.2139/ssrn.1305671

Contact Information

Dimitri Vayanos (Contact Author)
London School of Economics ( email )
A350
Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)20 7955 6382 (Phone)
+44 (0)20 7955 7420 (Fax)
Center for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Paul Woolley
London School of Economics ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
44-20-7955-7477 (Phone)
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