Advanced Search
MyIDEAS: Login to save this paper or follow this series

Passive Investment Strategies and Financial Bubbles

Contents:

Author Info

  • Fischer, Thomas

Abstract

In this paper, a model of bounded rational investors investing their portfolio in a passive investment vehicle (e.g., an Exchange Traded Fund replicating a broad index) or an actively managed fund is presented. The model proposes that the quick reswitching of these short-term oriented investors induces momentum behavior in prices. Investors prefer passsive funds in time of low risk-free rates and when active funds charge high management costs. Actively managed funds have a lower volatility but are only able to outperform the passive funds in downturns. Simulations confirm the emergence of two regimes: a regime where prices are close to fundamentals and another regime with a positive bubble. The size and the length of this bubble increases for low market liquidity and high switching speed of investors. The market volatility increases for strong reswitching activities and short-term thinking of bounded rational investors. Negative bubbles (market prices lower than fundamentals) tend to occur if active portfolio managers exhibit high risk aversion, but are less frequent than positive bubbles.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.download.tu-darmstadt.de/wi/vwl/ddpie/ddpie_212.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL) in its series Darmstadt Discussion Papers in Economics with number 57576.

as in new window
Length:
Date of creation: 11 Apr 2012
Date of revision:
Publication status: Published in Darmstadt Discussion Papers in Economics . 212 (2012-04-11)
Handle: RePEc:dar:ddpeco:57576

Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/57576/
Contact details of provider:
Postal: Hochschulstr. 1, 64289 Darmstadt
Phone: ++49 (0)6151 16-2701
Fax: ++49 (0)6151 16-6508
Email:
Web page: http://www.wi.tu-darmstadt.de/fachgebiete/fachgebiete_4/volkswirtschaftlichefachgebiete.de.jsp
More information through EDIRC

Related research

Keywords: stock market - passive trading - financial stability - arbitrage trading - financial bubbles - Heterogeneous Agent Model;

This paper has been announced in the following NEP Reports:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:dar:ddpeco:57576. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dekanatssekretariat).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.