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Do fund flows cause the value and momentum effects?

Do fund flows cause the value and momentum effects?

05-05-2016 | From the field

In this study the authors argue that the value and momentum effects may be the result of fund flows. They propose a model in which flows between investment funds are triggered by changes in fund managers’ efficiency, which investors either observe directly or infer from past performance.

  • David Blitz
    David
    Blitz
    Head of Quant Research

They find that momentum arises if fund flows exhibit inertia, and because rational prices do not fully adjust to reflect future flows. A value (reversal) effect arises because flows push prices away from fundamental values.

Besides momentum and value effects, the model also predicts co-movement, lead-lag effects and amplification, with these being larger for high-idiosyncratic-risk assets. We like this study because it helps to rationalize the existence of the value and momentum effects, which are typically attributed to ‘irrational’ investor behavior.

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From the field
From the field

Nuestros investigadores publican multitud de informes basados en sus propios estudios empíricos; también siguen los análisis cuantitativos que hacen los demás. Comentarios de nuestro responsable de análisis cuantitativo para renta variable, David Blitz, sobre publicaciones externas de gran relevancia.

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