Style investing

We study asset prices in an economy where some investors classify risky assets into di fferent styles and move funds back and forth between these styles depending on their relative performance. Our assumptions imply that news about one style can a ffect the prices of other apparently unrelated styles, that assets in the same style will comove too much while assets in di fferent styles comove too little, and that high average returns on a style will be associated with common factors for reasons unrelated to risk. They also lead to a rich pattern of own- and cross- autocorrelations, sample premia that can be very di fferent from true premia, and imply that style momentum strategies will be pro table. We use our model to shed light on many puzzling features of the data.