Style investing

Abstract

journal of financial economics 68 (2003) 161–199 style investing$ nicholas barberisa,*, andrei shleiferb a graduate school of business, university of chicago, chicago, il 60637, usa b department of economics, harvard university, cambridge, ma 02138, usa received 28 november 2000; received in revised form 11 december 2001 abstract 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 with that 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. r 2003 elsevier science b.v. all rights reserved. jel classification: g11, g12, g14 keywords: style investing; comovement; positive feedback; value; momentum 1. introduction one of the clearest mechanisms of human thought is classification, the grouping of objects into categories based on some similarity among them (rosch and lloyd, 1978; wilson and keil, 1999). we group countries into democracies and dictatorships based on features of political systems within each group. we classify $we have benefited from …

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