Citation

BibTex format

@article{Cont:2016:10.1142/S0219024916500102,
author = {Cont, R and Wagalath, L},
doi = {10.1142/S0219024916500102},
journal = {International Journal of Theoretical & Applied Finance},
title = {INSTITUTIONAL INVESTORS AND THE DEPENDENCESTRUCTURE OF ASSET RETURNS},
url = {http://dx.doi.org/10.1142/S0219024916500102},
volume = {19},
year = {2016}
}

RIS format (EndNote, RefMan)

TY  - JOUR
AB - We propose a model of a financial market with multiple assets that takes into accountthe impact of a large institutional investor rebalancing its positions so as to maintaina fixed allocation in each asset. We show that feedback effects can lead to significantexcess realized correlation between asset returns and modify the principal componentstructure of the (realized) correlation matrix of returns. Our study naturally links, ina quantitative manner, the properties of the realized correlation matrix — correlationbetween assets, eigenvectors and eigenvalues — to the sizes and trading volumes oflarge institutional investors. In particular, we show that even starting with uncorrelated“fundamentals”, fund rebalancing endogenously generates a correlation matrix of returnswith a first eigenvector with positive components, which can be associated to the market,as observed empirically. Finally, we show that feedback effects flatten the differencesbetween the expected returns of assets and tend to align them with the returns of theinstitutional investor’s portfolio, making this benchmark fund more difficult to beat, notbecause of its strategy but precisely because of its size and market impact.
AU - Cont,R
AU - Wagalath,L
DO - 10.1142/S0219024916500102
PY - 2016///
SN - 1793-6322
TI - INSTITUTIONAL INVESTORS AND THE DEPENDENCESTRUCTURE OF ASSET RETURNS
T2 - International Journal of Theoretical & Applied Finance
UR - http://dx.doi.org/10.1142/S0219024916500102
VL - 19
ER -