Modeling Style Rotation: Switching and Re-Switching

Edward Golosov and S.E. Satchell
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Edward Golosov: Department of Economics, Mathematics & Statistics, Birkbeck
S.E. Satchell: Department of Economics, Mathematics & Statistics, Birkbeck

No 1203, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: The purpose of this paper is to investigate the dynamics and statistics of style rotation based on the Barberis-Shleifer model of style switching. Investors in stocks regard the forecasting of style-relative performance, especially style rotation, as highly desirable but difficult to achieve in practice. Whilst we do not claim to be able to do this in an empirical sense, we do provide a framework for addressing these issues. We develop some new results from the Barberis-Shleifer model which allows us to understand some of the time series properties of style relative price performance and determine the statistical properties of the time until a switch between styles. We apply our results to a set of empirical data to get estimates of some of the model parameters including the level of risk aversion of market participants.

Keywords: Market dynamics; asset prices; style rotation; momentum investing (search for similar items in EconPapers)
Date: 2012-01
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https://eprints.bbk.ac.uk/id/eprint/5956 First version, 2012 (application/pdf)

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