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Fund flows and asset prices: a baseline model

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  • Vayanos, Dimitri
  • Woolley, Paul

Abstract

We study flows between investment funds and their effects on asset prices in a simple twoperiod version of Vayanos and Woolley (2010, VW). As in VW, flows cause assets to comove 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. This is a revised version of Working Paper Series No 15, FMG Discussion Paper No 662.

Suggested Citation

  • Vayanos, Dimitri & Woolley, Paul, 2011. "Fund flows and asset prices: a baseline model," LSE Research Online Documents on Economics 29784, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:29784
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    File URL: http://eprints.lse.ac.uk/29784/
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    References listed on IDEAS

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    2. Brennan, Michael J., 1993. "Agency and Asset Pricing," University of California at Los Angeles, Anderson Graduate School of Management qt53k014sd, Anderson Graduate School of Management, UCLA.
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    Cited by:

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    2. Cujean, Julien, 2020. "Idea sharing and the performance of mutual funds," Journal of Financial Economics, Elsevier, vol. 135(1), pages 88-119.

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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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