Strategic Complementarity and Substitutability of Investment Strategies
53 Pages Posted: 10 Jan 2022 Last revised: 18 Jul 2023
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.
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