Discussion Paper Details
Please find the details for DP16527 in an easy to copy and paste format below:
Title: What Alleviates Crowding in Factor Investing?
Author(s): Victor DeMiguel, Alberto Martin-Utrera and Raman Uppal
Publication Date: September 2021
Keyword(s): capacity of quantitative strategies, Competition and price impact
Programme Area(s): Financial Economics
Abstract: The growing number of institutions exploiting factor-investing strategies raises concerns that crowding may increase price-impact costs and erode profits. We identify a mechanism that alleviates crowding -- trading diversification: institutions exploiting different characteristics can reduce each other's price-impact costs even when their rebalancing trades are not negatively correlated. Empirically, trading diversification increases capacity by 45%, optimal investment by 43%, and profits by 22%. Using a game-theoretic model, we show that, while competition to exploit a characteristic erodes its profits because of crowding, competition among institutions exploiting other characteristics alleviates crowding. Using mutual-fund holdings, we provide empirical support for the model's predictions.
For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16527
DeMiguel, V, Martin-Utrera, A and Uppal, R. 2021. 'What Alleviates Crowding in Factor Investing?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16527