Strategic Complementarity and Substitutability of Investment Strategies

53 Pages Posted: 10 Jan 2022 Last revised: 18 Jul 2023

See all articles by Nikolay Doskov

Nikolay Doskov

LGT Capital Partners

Thorsten Hens

University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute

Klaus Reiner Schenk-Hoppé

The University of Manchester - Department of Economics

Date Written: July 11, 2023

Abstract

Investors in equities tend to follow well-defined investment strategies based on characteristics such as market capitalization and dividend yield or factors such as size, value, momentum and quality which capture the cross-section of asset returns. In this paper, we explore the interaction of such investment strategies in a demand-driven framework. The aim is to quantify the impact of a reallocation of capital between strategies on the cross-section of their performance. The main finding is that self- and cross-impact caused by the reallocation of capital can explain capacity of strategies, correlation of returns and the cyclical nature of investment strategies’ risk premia.

Keywords: demand driven asset pricing, reallocation of market capital, impact matrix.

JEL Classification: C3, C6, G11, G12.

Suggested Citation

Doskov, Nikolay and Hens, Thorsten and Schenk-Hoppé, Klaus Reiner, Strategic Complementarity and Substitutability of Investment Strategies (July 11, 2023). Swiss Finance Institute Research Paper No. 22-04, Available at SSRN: https://ssrn.com/abstract=4003060 or http://dx.doi.org/10.2139/ssrn.4003060

Nikolay Doskov

LGT Capital Partners ( email )

Pfa ̈ffikon
Switzerland

Thorsten Hens (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 32
Zurich, 8032
Switzerland
+41-44 634 37 06 (Phone)

Norwegian School of Economics and Business Administration (NHH)

Helleveien 30
Bergen, 5045
Norway

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Klaus Reiner Schenk-Hoppé

The University of Manchester - Department of Economics ( email )

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

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