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Equilibrium prices in the presence of delegated portfolio management

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  • Cuoco, Domenico
  • Kaniel, Ron
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    Abstract

    This paper analyzes the asset pricing implications of commonly used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a benchmark portfolio. The contract parameters, the extent of delegation, and equilibrium prices are all determined endogenously within the model we consider. Symmetric (fulcrum) performance fees distort the allocation of managed portfolios in a way that induces a significant and unambiguous positive effect on the prices of the assets included in the benchmark and a negative effect on the Sharpe ratios. Asymmetric performance fees have more complex effects on equilibrium prices and Sharpe ratios, with the signs of these effects fluctuating stochastically over time in response to variations in the funds' excess performance.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 101 (2011)
    Issue (Month): 2 (August)
    Pages: 264-296

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    Handle: RePEc:eee:jfinec:v:101:y:2011:i:2:p:264-296

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Asset pricing Delegation Agency Money management General equilibrium;

    References

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    Cited by:
    1. Agarwal, Vikas & Gómez, Juan-Pedro & Priestley, Richard, 2011. "Management compensation and market timing under portfolio constraints," CFR Working Papers 11-16, University of Cologne, Centre for Financial Research (CFR).
    2. Huang, Shiyang & Qiu, Zhigang & Shang, Qi & Tang, Ke, 2013. "Asset pricing with heterogeneous beliefs and relative performance," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4107-4119.
    3. Suleyman Basak & Dmitry Makarov, 2013. "Competition among Portfolio Managers and Asset Specialization," Working Papers w0194, Center for Economic and Financial Research (CEFIR).
    4. Veronica Guerrieri & Peter Kondor, 2010. "Fund managers, career concerns, and asset price volatility," Staff Report 446, Federal Reserve Bank of Minneapolis.
    5. Yan Li & Baimin Yu, 2012. "Portfolio selection of a closed-end mutual fund," Computational Statistics, Springer, vol. 75(3), pages 245-272, June.
    6. Rudiger, Jesper & Vigier, Adrien, 2013. "Financial Experts, Asset Prices and Reputation," MPRA Paper 51784, University Library of Munich, Germany.
    7. Basak, Suleyman & Makarov, Dmitry, 2012. "Difference in interim performance and risk taking with short-sale constraints," Journal of Financial Economics, Elsevier, vol. 103(2), pages 377-392.
    8. Pástor, Ľuboš & Veronesi, Pietro, 2013. "Political uncertainty and risk premia," Journal of Financial Economics, Elsevier, vol. 110(3), pages 520-545.
    9. Sheng, Jiliang & Wang, Jian & Wang, Xiaoting & Yang, Jun, 2014. "Asymmetric contracts, cash flows and risk taking of mutual funds," Economic Modelling, Elsevier, vol. 38(C), pages 435-442.
    10. Igan, Deniz & Pinheiro, Marcelo, 2012. "The effects of relative performance objectives on financial markets," MPRA Paper 43452, University Library of Munich, Germany.
    11. Lan, Yingcong & Wang, Neng & Yang, Jinqiang, 2013. "The economics of hedge funds," Journal of Financial Economics, Elsevier, vol. 110(2), pages 300-323.
    12. Holmén, Martin & Kirchler, Michael & Kleinlercher, Daniel, 2012. "Do Option-like Incentives Induce Overvaluation? Evidence from Experimental Asset Markets," Working Papers in Economics 540, University of Gothenburg, Department of Economics, revised 21 Nov 2012.
    13. Kleinlercher, Daniel & Huber, Jürgen & Kirchler, Michael, 2014. "The impact of different incentive schemes on asset prices," European Economic Review, Elsevier, vol. 68(C), pages 137-150.
    14. Gupta-Mukherjee, Swasti, 2013. "When active fund managers deviate from their peers: Implications for fund performance," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1286-1305.

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