Smart-Beta Herding and Its Economic Risks: Riding the Dragon?

FinTech working paper no. 3, 2018

54 Pages Posted: 9 Oct 2018

See all articles by Eduard Krkoska

Eduard Krkoska

University of Manchester, Faculty of Humanities, School of Social Sciences, Department of Economics, Students

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics; Norwegian School of Economics (NHH) - Department of Finance

Date Written: September 27, 2018

Abstract

Smart-beta (or factor) investing industry’s assets under management have grown to over $1 trillion. We attempt to survey the merits and risks of this investment style from both professional investors’ and academics’ points of view. After reviewing academic papers, reports of practitioners in the field and relevant news articles around the topic as well as the literature on herding in financial markets, we conclude that herding in smart-beta is likely taking place, with a distinct and growing possibility of a market correction that would catch many factor investors wrong-footed.

Keywords: Smart beta, factor investing, herding

JEL Classification: G11, G01, G02

Suggested Citation

Krkoska, Eduard and Schenk-Hoppé, Klaus Reiner, Smart-Beta Herding and Its Economic Risks: Riding the Dragon? (September 27, 2018). FinTech working paper no. 3, 2018. Available at SSRN: https://ssrn.com/abstract=3256432 or http://dx.doi.org/10.2139/ssrn.3256432

Eduard Krkoska

University of Manchester, Faculty of Humanities, School of Social Sciences, Department of Economics, Students ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Klaus Reiner Schenk-Hoppé (Contact Author)

University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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