IDEAS home Printed from https://ideas.repec.org/p/ecm/feam04/797.html
   My bibliography  Save this paper

The Markovian Dynamics of "Smart Money"

Author

Listed:
  • J-H Steffi Yang

Abstract

I develop a Markov model of samrt money chasing past winning funds while taking into account associated costs. The model also allows market capital entry and exit. The steady-state capital allocations re derived using constant transition probabilities. The results sugget that down side risk is significantly attributed to investor overreactoin, even though a small degree of investment movement as opposed to capital immobility can in fact stabilize the market. Furthermore, performance sensitivity makes it possible that two much-debated fund styles, passive indexing and active management, are simultaneously profitable. If money is insensitive, the model becomes a zero-sum game where one strategy's profitability is always at the cost of the other

Suggested Citation

  • J-H Steffi Yang, 2004. "The Markovian Dynamics of "Smart Money"," Econometric Society 2004 Far Eastern Meetings 797, Econometric Society.
    • Handle: RePEc:ecm:feam04:797
    as

    Download full text from publisher

    File URL: http://repec.org/esFEAM04/up.11840.1086268553.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Grinblatt, Mark & Titman, Sheridan, 1993. "Performance Measurement without Benchmarks: An Examination of Mutual Fund Returns," The Journal of Business, University of Chicago Press, vol. 66(1), pages 47-68, January.
    2. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1703, August.
    3. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    4. Lu Zheng, 1999. "Is Money Smart? A Study of Mutual Fund Investors' Fund Selection Ability," Journal of Finance, American Finance Association, vol. 54(3), pages 901-933, June.
    5. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock‐Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1695, August.
    6. Grinblatt, Mark & Titman, Sheridan D, 1989. "Mutual Fund Performance: An Analysis of Quarterly Portfolio Holdings," The Journal of Business, University of Chicago Press, vol. 62(3), pages 393-416, July.
    7. Brown, Stephen J & Goetzmann, William N, 1995. "Performance Persistence," Journal of Finance, American Finance Association, vol. 50(2), pages 679-698, June.
    8. Alessio Sancetta & Steve Satchell, 2004. "Calculating hedge fund risk: the draw down and the maximum draw down," Applied Mathematical Finance, Taylor & Francis Journals, vol. 11(3), pages 259-282.
    9. Judith Chevalier & Glenn Ellison, 1999. "Are Some Mutual Fund Managers Better Than Others? Cross‐Sectional Patterns in Behavior and Performance," Journal of Finance, American Finance Association, vol. 54(3), pages 875-899, June.
    10. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    11. J.-H. Steffi Yang & Satchell, S.E., 2002. "The Impact of Technical Analysis on Asset Price Dynamics," Cambridge Working Papers in Economics 0219, Faculty of Economics, University of Cambridge.
    12. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
    13. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dariusz Filip & Tomasz Rogala, 2021. "Analysis of Polish mutual funds performance: a Markovian approach," Statistics in Transition New Series, Polish Statistical Association, vol. 22(1), pages 115-130, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hung, Pi-Hsia & Lien, Donald & Kuo, Ming-Sin, 2020. "Window dressing in equity mutual funds," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 338-354.
    2. Ferson, Wayne E., 2013. "Investment Performance: A Review and Synthesis," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 969-1010, Elsevier.
    3. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2005. "On the Industry Concentration of Actively Managed Equity Mutual Funds," Journal of Finance, American Finance Association, vol. 60(4), pages 1983-2011, August.
    4. Agarwal, Vikas & Gay, Gerald D. & Ling, Leng, 2013. "Window dressing in mutual funds," CFR Working Papers 11-07 [rev.2], University of Cologne, Centre for Financial Research (CFR).
    5. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2008. "Unobserved Actions of Mutual Funds," The Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2379-2416, November.
    6. Agarwal, Vikas & Gay, Gerald D. & Ling, Leng, 2014. "Window dressing in mutual funds," CFR Working Papers 11-07 [rev.3], University of Cologne, Centre for Financial Research (CFR).
    7. Hunter, David & Kandel, Eugene & Kandel, Shmuel & Wermers, Russ, 2009. "Endogenous benchmarks," CFR Working Papers 10-02, University of Cologne, Centre for Financial Research (CFR).
    8. Lan, Chunhua & Moneta, Fabio & Wermers, Russ, 2018. "Holding Horizon: A New Measure of Active Investment Management," CFR Working Papers 15-06, University of Cologne, Centre for Financial Research (CFR), revised 2018.
    9. Bryant, Lonnie L., 2012. "“Down but Not Out” mutual fund manager turnover within fund families," Journal of Financial Intermediation, Elsevier, vol. 21(4), pages 569-593.
    10. Jiang, Hao & Verardo, Michela, 2013. "Does herding behavior reveal skill? An analysis of mutual fund performance," LSE Research Online Documents on Economics 119034, London School of Economics and Political Science, LSE Library.
    11. Hao Jiang & Michela Verardo, "undated". "Does herding behavior reveal skill? An analysis of mutual fund performance," FMG Discussion Papers dp720, Financial Markets Group.
    12. Agarwal, Vikas & Gay, Gerald D. & Ling, Leng, 2012. "Performance inconsistency in mutual funds: An investigation of window-dressing behavior," CFR Working Papers 11-07 [rev.], University of Cologne, Centre for Financial Research (CFR).
    13. Agarwal, Vikas & Gay, Gerald D. & Ling, Leng, 2011. "Window dressing in mutual funds," CFR Working Papers 11-07, University of Cologne, Centre for Financial Research (CFR).
    14. Gil-Bazo, Javier & Ruiz-Verdú, Pablo, 2006. "Yet another puzzle? the relation between price and performance in the mutual fund industry," DEE - Working Papers. Business Economics. WB wb066519, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    15. Jason P. Berkowitz & Patrick J. Schorno & Dmitry A. Shapiro, 2017. "Characteristics of mutual funds with extreme performance," Review of Financial Economics, John Wiley & Sons, vol. 34(1), pages 50-60, September.
    16. Wermers, Russ & Yao, Tong & Zhao, Jane, 2007. "The investment value of mutual fund portfolio disclosure," CFR Working Papers 06-09, University of Cologne, Centre for Financial Research (CFR).
    17. Elton, Edwin J. & Gruber, Martin J., 2013. "Mutual Funds," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1011-1061, Elsevier.
    18. Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2011. "Risk Shifting and Mutual Fund Performance," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2575-2616.
    19. Berkowitz, Jason P. & Schorno, Patrick J. & Shapiro, Dmitry A., 2017. "Characteristics of mutual funds with extreme performance," Review of Financial Economics, Elsevier, vol. 34(C), pages 50-60.
    20. Bryant, Lonnie L. & Liu, Hao-Chen, 2011. "Mutual fund industry management structure, risk and the impacts to shareholders," Global Finance Journal, Elsevier, vol. 22(2), pages 101-115.

    More about this item

    Keywords

    markov model; fund styles; drawdown; capital movement;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:feam04:797. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christopher F. Baum (email available below). General contact details of provider: https://edirc.repec.org/data/essssea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.