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The Markovian Dynamics of "Smart Money"

Steffi Yang J-H

No 797, Econometric Society 2004 Far Eastern Meetings from Econometric Society

Abstract: I develop a Markov model of samrt money chasing past winning funds while taking into account associated costs. The model also allows market capital entry and exit. The steady-state capital allocations re derived using constant transition probabilities. The results sugget that down side risk is significantly attributed to investor overreactoin, even though a small degree of investment movement as opposed to capital immobility can in fact stabilize the market. Furthermore, performance sensitivity makes it possible that two much-debated fund styles, passive indexing and active management, are simultaneously profitable. If money is insensitive, the model becomes a zero-sum game where one strategy's profitability is always at the cost of the other

Keywords: markov model; fund styles; drawdown; capital movement (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-ifn
Date: 2004-08-11
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