The Markovian Dynamics of "Smart Money"
Steffi Yang J-H
No 797, Econometric Society 2004 Far Eastern Meetings from Econometric Society
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
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:feam04:797
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