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The impact on the pricing process of costly active management and performance chasing clients

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Author Info

  • Ron Bird
  • Lorenzo Casavecchia
  • Paolo Pellizzari

    ()

  • Paul Woolley

Abstract

One of the necessary features of markets to produce efficient pricing is competition between information-based investors who quickly impound new information into price. However, a signifficant proportion of funds invested in today's equity markets are in the hands of managers who pursue a style that utilises little or none of the available information. We simulate such a market where the funds are being managed using the following three investment styles: fundamental, momentum and index. We confirm that the major pricing anomalies that have been highlighted previously in the literature are a natural consequence of competition between managers utilising these three investment styles. More importantly, we show that this situation is unlikely to change as long as markets continue to be dominated by costly active managers with clients who pursue outperformance.

(This abstract was borrowed from another version of this item.)

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File URL: http://hdl.handle.net/10.1007/s11403-010-0076-4
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Bibliographic Info

Article provided by Springer in its journal Journal of Economic Interaction and Coordination.

Volume (Year): 6 (2011)
Issue (Month): 1 (May)
Pages: 61-82

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Handle: RePEc:spr:jeicoo:v:6:y:2011:i:1:p:61-82

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Web page: http://www.springer.com/economics/economic+theory/journal/11403

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