Can Competition Increase Profits in Factor Investing?

Victor DeMiguel (), Alberto Martín-Utrera () and Raman Uppal ()
Additional contact information
Victor DeMiguel: London Business School, London NW1 4SA, United Kingdom
Alberto Martín-Utrera: Iowa State University, Ames, Iowa 50011
Raman Uppal: EDHEC Business School, 59100 Roubaix, France; and Center for Economic and Policy Research, Washington, District of Columbia 20009

Management Science, 2025, vol. 71, issue 7, 5552-5571

Abstract: The increasing number of institutions exploiting factor-investing strategies raises concerns that competition may erode profits. We use a game-theoretic model to show that, whereas competition among investors exploiting a particular factor erodes profits because of the negative externality of their price impact on each other, competition to exploit other factors can increase profits from the first factor because of the positive externality from trading diversification (netting of trades across factors). Using data for 18 factors as well as mutual fund holdings, we show that competition and trading diversification substantially affect the profits from factor investing.

Keywords: capacity of quantitative strategies; crowding; price impact (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2022.02684 (application/pdf)

Related works:
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:inm:ormnsc:v:71:y:2025:i:7:p:5552-5571

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().