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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.

Suggested Citation

  • Dimitri Vayanos & Paul Woolley, 2011. "Fund Flows and Asset Prices: A Baseline Model," FMG Discussion Papers dp667, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp667
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    References listed on IDEAS

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    Cited by:

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    2. Raddatz, Claudio & Schmukler, Sergio L. & Williams, Tomás, 2017. "International asset allocations and capital flows: The benchmark effect," Journal of International Economics, Elsevier, vol. 108(C), pages 413-430.

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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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