The Markovian Dynamics of "Smart Money"
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
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- 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.
- 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.
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