The paper studies 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 this 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. The authors 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. The model is used to shed light on several style-related empirical anomalies.
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