INSTITUTIONAL INVESTORS AND THE DEPENDENCE STRUCTURE OF ASSET RETURNS

Cont, Rama; Wagalath, Lakshithe

Type de document :

Compte-rendu et recension critique d'ouvrage

DOI :

10.1142/s0219024916500102

Titre :

INSTITUTIONAL INVESTORS AND THE DEPENDENCE STRUCTURE OF ASSET RETURNS

Auteur(s) :

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

Lille économie management - UMR 9221 [LEM]

Titre de la revue :

International Journal of Theoretical and Applied Finance

Pagination :

1650010

Éditeur :

World Scientific Publishing

Date de publication :

2016-03

ISSN :

0219-0249

Mot(s)-clé(s) en anglais :

Liquidity
feedback effects
institutional investors
endogenous correlations

Discipline(s) HAL :

Sciences de l'Homme et Société/Gestion et management

Résumé en anglais : [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 ...
Lire la suite >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.Lire moins >

Langue :

Anglais

Vulgarisation :

Non

Collections :