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Passive Investment Strategies and Financial Bubbles

Fischer, Thomas :
Passive Investment Strategies and Financial Bubbles.
[Online-Edition: http://tuprints.ulb.tu-darmstadt.de/4714]
In: Darmstadt Discussion Papers in Economics , 212 . Darmstadt
[Report] , (2012)

Offizielle URL: http://tuprints.ulb.tu-darmstadt.de/4714

Kurzbeschreibung (Abstract)

In this paper, a model of bounded rational investors investing their portfolio in a passive investment vehicle (e.g., an Exchange Traded Fund replicating a broad index) or an actively managed fund is presented. The model proposes that the quick reswitching of these short-term oriented investors induces momentum behavior in prices. Investors prefer passsive funds in time of low risk-free rates and when active funds charge high management costs. Actively managed funds have a lower volatility but are only able to outperform the passive funds in downturns. Simulations confirm the emergence of two regimes: a regime where prices are close to fundamentals and another regime with a positive bubble. The size and the length of this bubble increases for low market liquidity and high switching speed of investors. The market volatility increases for strong reswitching activities and short-term thinking of bounded rational investors. Negative bubbles (market prices lower than fundamentals) tend to occur if active portfolio managers exhibit high risk aversion, but are less frequent than positive bubbles.

Typ des Eintrags: Report
Erschienen: 2012
Autor(en): Fischer, Thomas
Titel: Passive Investment Strategies and Financial Bubbles
Sprache: Englisch
Kurzbeschreibung (Abstract):

In this paper, a model of bounded rational investors investing their portfolio in a passive investment vehicle (e.g., an Exchange Traded Fund replicating a broad index) or an actively managed fund is presented. The model proposes that the quick reswitching of these short-term oriented investors induces momentum behavior in prices. Investors prefer passsive funds in time of low risk-free rates and when active funds charge high management costs. Actively managed funds have a lower volatility but are only able to outperform the passive funds in downturns. Simulations confirm the emergence of two regimes: a regime where prices are close to fundamentals and another regime with a positive bubble. The size and the length of this bubble increases for low market liquidity and high switching speed of investors. The market volatility increases for strong reswitching activities and short-term thinking of bounded rational investors. Negative bubbles (market prices lower than fundamentals) tend to occur if active portfolio managers exhibit high risk aversion, but are less frequent than positive bubbles.

Reihe: Darmstadt Discussion Papers in Economics
Band: 212
Ort: Darmstadt
Freie Schlagworte: stock market - passive trading - financial stability - arbitrage trading - financial bubbles - Heterogeneous Agent Model
Fachbereich(e)/-gebiet(e): 01 Fachbereich Rechts- und Wirtschaftswissenschaften
01 Fachbereich Rechts- und Wirtschaftswissenschaften > Volkswirtschaftliche Fachgebiete
01 Fachbereich Rechts- und Wirtschaftswissenschaften > Volkswirtschaftliche Fachgebiete > Fachgebiet Makroökonomie und Finanzmärkte
Hinterlegungsdatum: 31 Jan 2016 20:58
Offizielle URL: http://tuprints.ulb.tu-darmstadt.de/4714
URN: urn:nbn:de:tuda-tuprints-47149
Zusätzliche Informationen:

JEL classification: G11 - C15 - C62 - D58

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