An institutional theory of momentum and reversal

Dimitri Vayanos and Paul Woolley

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

JEL-codes: E17 (search for similar items in EconPapers)
Pages: 78 pages
Date: 2011-11-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://eprints.lse.ac.uk/24423/ Open access version. (application/pdf)

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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24423

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().