Why do investors pursue style investing? Find out below
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Abstract (Via Barberis & Shleifer)
We study asset prices in an economy where some investors categorize risky assets into different styles and move funds among these styles depending on their relative performance. In our economy, assets in the same style comove too much, assets in different styles comove too little, and reclassifying an asset into a new style raises its correlation withth at style. We also predict that style returns exhibit a rich pattern of own- and cross-autocorrelations and that while asset-level momentum and value strategies are profitable, their style-level counterparts are even more so. We use the model to shed light on several style-related empirical anomalies.
Click Here To Read: Style Investing
There are at least two reasons why both institutional and individual investors might pursue style investing. First, categorization simplifies problems of choice and allows us to process vast amounts of information reasonably efficiently (Mullainathan, 2000). Allocating money across ten asset styles is far less intimidating than choosing among the thousands of listed securities. Second, the creation of asset categories helps investors evaluate the performance of professional money managers, since a style automatically creates a peer group of managers who pursue that
particular style (Sharpe, 1992). Money managers are now increasingly evaluated relative to a performance benchmark specific to their style, such as a growth or a value index.
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