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Complex Asset Markets
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PRE
AI
DOI：10.1111/jofi.13264.png)
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Abstract
En 中文
Investors' individual arbitrage models introduce idiosyncratic risk into complex asset strategies, driving up average returns and Sharpe ratios. However, despite the attractive risk-return trade-off, participation is limited. This is because effective Sharpe ratios in complex asset markets vary with investors' expertise. Investors with higher expertise, better models, and lower resulting idiosyncratic risk exposures realize higher Sharpe ratios. Their demand deters entry by less sophisticated investors. As predicted by our model, market dislocations are characterized by an increase in idiosyncratic risk, investor exit, and persistently elevated alphas and Sharpe ratios. The selection effect from higher expertise agents' more favorable Sharpe ratios is unique to our model and key to our main results.
Keywords:
HIGH-WATER MARKS
EQUILIBRIUM-MODEL
SIZE DISTRIBUTION
COSTLY ARBITRAGE
CAPITAL-MARKET
RISK
DYNAMICS
HEDGE
PRICE
WEALTH
Journal
IF:
9.5
Papers:
4.0K
Citations:
5.0W
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