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Fund Flows and Asset Prices: A Baseline Model

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  • Dimitri Vayanos

    ()

  • Paul Woolley

    ()

Abstract

We study flows between investment funds and their effects on asset prices in a simple two period version of Vayanos and Woolley (2010, VW). As in VW, flows cause assets to commove in ways unrelated to fundamentals, affect assets with high idiosyncratic risk the most, and raise the expected returns of funds experiencing outflows. We sketch how adding periods can generate other results of VW such as momentum, reversal, amplification, and commercial-risk management. We also extend the VW framework to study how index redefinitions affect the price level and the extent of comovement.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/DP667_2011_FundFlowsandAssetPricesaBaselineModel.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp667.

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Date of creation: Jan 2011
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Handle: RePEc:fmg:fmgdps:dp667

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Web page: http://www.lse.ac.uk/fmg/

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  1. Jotikasthira, Chotibhak & Lundblad, Christian T. & Ramadorai, Tarun, 2009. "Asset fire sales and purchases and the international transmission of financial shocks," CEPR Discussion Papers 7595, C.E.P.R. Discussion Papers.
  2. Basak, Suleyman & Pavlova, Anna, 2012. "Asset Prices and Institutional Investors," CEPR Discussion Papers 9120, C.E.P.R. Discussion Papers.
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