The Sound of Many Funds Rebalancing

59 Pages Posted: 16 Apr 2016 Last revised: 12 May 2020

See all articles by Alex Chinco

Alex Chinco

University of Chicago - Booth School of Business

Vyacheslav Fos

Boston College - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: May 12, 2020

Abstract

This paper proposes that computational complexity generates noise. The same asset is often held for completely different reasons by many funds following a wide variety of threshold-based trading rules. Under these conditions, we show it can be computationally infeasible to predict how these various trading rules will interact with one another, turning the net demand from these funds into unpredictable noise. This noise-generating mechanism can operate in a wide range of markets and also predicts how noise volatility will vary across assets. We confirm this prediction empirically using data on exchange-traded funds.

Keywords: Noise, Thresholds, Complexity, Indexing

JEL Classification: G00, G02, G14

Suggested Citation

Chinco, Alexander and Fos, Vyacheslav, The Sound of Many Funds Rebalancing (May 12, 2020). Available at SSRN: https://ssrn.com/abstract=2764941 or http://dx.doi.org/10.2139/ssrn.2764941

Alexander Chinco

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States

HOME PAGE: http://www.alexchinco.com

Vyacheslav Fos (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
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Chestnut Hill, MA 02467-3808
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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