An institutional Theory of Momentum and Reversal

Dimitri Vayanos and Paul Woolley ()

FMG Discussion Papers from Financial Markets Group

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' e±ciency, which investors either observe directly or infer from past performance. Momentum arises if fund °ows exhibit inertia, and because rational prices do not fully adjust to re°ect future °ows. Reversal arises because °ows push prices away from fundamental values. Besides momentum and reversal, fund °ows generate comovement, lead-lag e®ects and ampli¯cation, with all e®ects being larger for assets with high idiosyncratic risk. Managers' concern with commercial risk can make prices more volatile.

Date: 2011-01
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Related works:
Journal Article: An Institutional Theory of Momentum and Reversal (2013)
Working Paper: An institutional theory of momentum and reversal (2011)
Working Paper: An Institutional Theory of Momentum and Reversal (2008)
Working Paper: An Institutional Theory of Momentum and Reversal (2008)
Working Paper: An Institutional Theory of Momentum and Reversal (2008)
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