Tyrone W. Callahan

In a simple model based on the well-documented nature of mutual fund investment flows, I demonstrate that investor migrations can generate pricing patterns similar to those generated by models

that rely on feedback traders. The model is motivated by the lack of empirical evidence identifying

significant cohorts of positive feedback traders. The model replicates many empirical regularities

of financial markets, including:

“ excess price volatility

“ stochastic volatility

“ short-horizon return momentum

“ long-horizon return reversals

“ short-term underreaction to news

“ long-term overreaction to news

“ positive price-volume correlations

The model is well suited to the study of other aspects of delegated investment management. In particular,

investment fee differentials and the competitive viability of suboptimal investment strategies can be studied. Not only do the investment strategies chosen by funds impact investor migration,

but investor migration should influence the strategy choices of the investment funds. In addition,

further insights may be gained by examining the effects of different migration rates and the implied equity premium in a model with multi-period consumption. Examine the effect of investment fee

differentials.

This paper analyzes how uncertainty about the number of informed traders in a

market alters the market characteristics. Increasing the uncertainty about the number

of informed traders while holding the expected number of informed traders constant: (i)

increases the residual price uncertainty in the market; (ii) increases the total expected

volume of informed trade and profits earned by insiders; and (iii) significantly prolongs

the impact of an information event by extending the expected trade horizon of insiders

and the time over which market liquidity is depressed. These results are compared

with those found in experimental asset markets with a similar information structure.

The model confirms several of the broad experimental conclusions and provides new

insights in some important dimensions, particularly with respect to the behavior of

(unknown) monopolist insiders.