An institutional theory of momentum and reversal

Vayanos, Dimitri ORCID: 0000-0002-0944-4914 and Woolley, Paul (2011) An institutional theory of momentum and reversal. Financial Markets Group Discussion Papers (666). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We propose a rational theory of momentum and reversal based on delegated portfolio management. Flows between investment funds are triggered by changes in fund managers’ efficiency, which investors either observe directly or infer from past performance. Momentum arises if fund flows exhibit inertia, and because rational prices do not fully adjust to reflect future flows. Reversal arises because flows push prices away from fundamental values. Besides momentum and reversal, fund flows generate comovement, lead-lag effects and amplification, with all effects being larger for assets with high idiosyncratic risk. Managers’ concern with commercial risk can make prices more volatile.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2008 The Authors
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E17 - Forecasting and Simulation
Date Deposited:	15 Jul 2009 08:47
Last Modified:	13 Sep 2024 20:07
URI:	http://eprints.lse.ac.uk/id/eprint/24423

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