Modelling Style Rotation: Switching and Re-Switching

36 Pages Posted: 31 Aug 2013

See all articles by Edward Golosov

Edward Golosov

Imperial College London, Business School

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Date Written: January 13, 2012

Abstract

The paper helps understand some of the properties of asset returns that are caused by momentum-driven investors. The purpose of this paper is to investigate the dynamics and statistics of style rotation based on the Barberis-Shleifer model of style switching based on modelling interaction between two types of traders: momentum traders and fundamental traders. Whilst we do not claim to be able to do this in an empirical sense, we derive a number of closed-form solutions of the Barberis-Shleifer model which allow us to understand some of the time series properties of style relative price performance and determine the statistical properties of the time until a switch between styles. We apply our results to a set of empirical data to get estimates of some of the model parameters including the level of risk aversion of market participants.

Keywords: market dynamics, asset styles, style rotation, momentum

JEL Classification: C22, G12

Suggested Citation

Golosov, Edward and Satchell, Stephen E., Modelling Style Rotation: Switching and Re-Switching (January 13, 2012). Available at SSRN: https://ssrn.com/abstract=2315648 or http://dx.doi.org/10.2139/ssrn.2315648

Edward Golosov (Contact Author)

Imperial College London, Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
+447894812740 (Phone)

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
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Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

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