Zooming In on Equity Factor Crowding

Volpati, Valerio; Benzaquen, Michael; Eisler, Zoltán; Mastromatteo, Iacopo; Tóth, Bence; Bouchaud, Jean‐Philippe

doi:10.48550/arxiv.2001.04185

Cited by 4 publications

(10 citation statements)

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“…The phenomenon of crowding in financial markets has gained an increasing attention from both academics and financial institutions over the past couple of decades. It is a subject of numerous research works studying both theoretical and empirical aspects of the topic, including [9,27,3,1,5,4,18] among others. Crowding is often considered to be an explanation for sub-par performances of investments as well as the development of systemic risk in financial markets.…”

Section: Introductionmentioning

confidence: 99%

“…They investigated the circumstances under which systemic instabilities may occur as a result of various parameters, such as market crowding and price impact. Volpati et al [27] measured significant levels of crowding in U.S. equity markets for momentum signals as well as for Fama-French factors signals. In [22] an index reconstruction methodology was developed in order to measure the crowding effect on Russell indexes around reconstitutions events.…”

Section: Introductionmentioning

confidence: 99%

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Trading with the Crowd

Neuman¹,

Voß²

2021

Preprint

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We formulate and solve a multi-player stochastic differential game between financial agents who seek to cost-efficiently liquidate their position in a risky asset in the presence of jointly aggregated transient price impact, along with taking into account a common general price predicting signal. The unique Nash-equilibrium strategies reveal how each agent's liquidation policy adjusts the predictive trading signal to the aggregated transient price impact induced by all other agents. This unfolds a quantitative relation between trading signals and the order flow in crowded markets. We also formulate and solve the corresponding mean field game in the limit of infinitely many agents. We prove that the equilibrium trading speed and the value function of an agent in the finite N -player game converges to the corresponding trading speed and value function in the mean field game at rate O(N −2 ). In addition, we prove that the mean field optimal strategy provides an approximate Nash-equilibrium for the finite-player game.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Trading with the Crowd

Neuman¹,

Voß²

2021

Preprint

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“…It does not come as a surprise then, that Russell US indexes are the go-to equity universe for a wide body of academic literature, including portfolio management research [19,4,5,15,16] as well as market microstructure e.g. [7,37,14,39,8,6,9].…”

mentioning

confidence: 99%

“…Over the last 20 years, the phenomenon of crowding in financial markets has increasingly gained attention both from academics as well as from financial institutions. It is a subject of many research works studying both theoretical and empirical aspects including [18,37,9,1,11,12,29].…”

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confidence: 99%

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Evidence of Crowding on Russell 3000 Reconstitution Events

Micheli¹,

Neuman²

2020

Preprint

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We develop a methodology which replicates in great accuracy the FTSE Russell indexes reconstitutions, including the quarterly rebalancings due to new initial public offerings (IPOs). While using only data available in the CRSP US Stock database for our index reconstruction, we demonstrate the accuracy of this methodology by comparing it to the original Russell US indexes for the time period between 1989 to 2019. A python package that generates the replicated indexes is also provided [31].As an application, we use our index reconstruction protocol to compute the permanent and temporary price impact on the Russell 3000 annual additions and deletions, and on the quarterly additions of new IPOs . We find that the index portfolios following the Russell 3000 index and rebalanced on an annual basis are overall more crowded than those following the index on a quarterly basis. This phenomenon implies that transaction costs of indexing strategies could be significantly reduced by buying new IPOs additions in proximity to quarterly rebalance dates.

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Trading with the crowd

Neuman

Voß

2023

Mathematical Finance

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We formulate and solve a multi-player stochastic differential game between financial agents who seek to cost-efficiently liquidate their position in a risky asset in the presence of jointly aggregated transient price impact, along with taking into account a common general price predicting signal. The unique Nash-equilibrium strategies reveal how each agent's liquidation policy adjusts the predictive trading signal to the aggregated transient price impact induced by all other agents. This unfolds a quantitative relation between trading signals and the order flow in crowded markets. We also formulate and solve the corresponding mean field game in the limit of infinitely many agents. We prove that the equilibrium trading speed and the value function of an agent in the finite 𝑁-player game converges to the corresponding trading speed and value function in the mean field game at rate 𝑂(𝑁 −2 ). In addition, we prove that the mean field optimal strategy provides an approximate Nash-equilibrium for the finite-player game.

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Zooming In on Equity Factor Crowding

Cited by 4 publications

References 0 publications

Trading with the Crowd

Trading with the Crowd

Evidence of Crowding on Russell 3000 Reconstitution Events

Trading with the crowd

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