INSTITUTIONAL INVESTORS AND THE DEPENDENCE STRUCTURE OF ASSET RETURNS

Cont, Rama; Wagalath, Lakshithe

Document type :

Compte-rendu et recension critique d'ouvrage

DOI :

10.1142/s0219024916500102

Title :

INSTITUTIONAL INVESTORS AND THE DEPENDENCE STRUCTURE OF ASSET RETURNS

Author(s) :

Cont, Rama [Auteur]
Laboratoire de Probabilités et Modèles Aléatoires [LPMA]
Wagalath, Lakshithe [Auteur]

Lille économie management - UMR 9221 [LEM]

Journal title :

International Journal of Theoretical and Applied Finance

Pages :

1650010

Publisher :

World Scientific Publishing

Publication date :

2016-03

ISSN :

0219-0249

English keyword(s) :

Liquidity
feedback effects
institutional investors
endogenous correlations

HAL domain(s) :

Sciences de l'Homme et Société/Gestion et management

English abstract : [en]

We propose a model of a financial market with multiple assets that takes into account the impact of a large institutional investor rebalancing its positions so as to maintain a fixed allocation in each asset. We show that ...
Show more >We propose a model of a financial market with multiple assets that takes into account the impact of a large institutional investor rebalancing its positions so as to maintain a fixed allocation in each asset. We show that feedback effects can lead to significant excess realized correlation between asset returns and modify the principal component structure of the (realized) correlation matrix of returns. Our study naturally links, in a quantitative manner, the properties of the realized correlation matrix — correlation between assets, eigenvectors and eigenvalues — to the sizes and trading volumes of large institutional investors. In particular, we show that even starting with uncorrelated “fundamentals”, fund rebalancing endogenously generates a correlation matrix of returns with a first eigenvector with positive components, which can be associated to the market, as observed empirically. Finally, we show that feedback effects flatten the differences between the expected returns of assets and tend to align them with the returns of the institutional investor’s portfolio, making this benchmark fund more difficult to beat, not because of its strategy but precisely because of its size and market impact.Show less >

Language :

Anglais

Popular science :

Non

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