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Financial equilibrium with career concerns

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Author Info
Prat, Andrea () (LSE)
Dasgupta, Amil () (LSE)

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Abstract

What are the equilibrium features of a financial market where a sizeable proportion of traders face reputational concerns? This question is central to our understanding of financial markets, which are increasingly dominated by institutional investors. We construct a model of delegated portfolio management that captures key features of the US mutual fund industry and embed it in an asset pricing framework. We thus provide a formal model of financial equilibrium with career concerned agents. Fund managers differ in their ability to understand market fundamentals, and in every period investors choose a fund. In equilibrium, the presence of career concerns induces uninformed fund managers to churn, i.e., to engage in trading even when they face a negative expected return. Churners act as noise traders and enhance the level of trading volume. The equilibrium relationship between fund return and net fund flows displays a skewed shape that is consistent with stylized facts. The robustness of our core results is probed from several angles.

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File URL: http://econtheory.org/ojs/index.php/te/article/view/20060067/11
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Publisher Info
Article provided by Society for Economic Theory in its journal Theoretical Economics.

Volume (Year): 1 (2006)
Issue (Month): 1 (March)
Pages: 67-93
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Handle: RePEc:the:publsh:165

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Web page: http://econtheory.org

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Related research
Keywords: Career concerns; financial equilibrium; trade volume;

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Find related papers by JEL classification:
G0 - Financial Economics - - General
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dasgupta, Amil & Prat, Andrea & Verardo, Michela, 2007. "Institutional Trade Persistence and Long-Term Equity Returns," CEPR Discussion Papers 6374, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Dimitrios Tsomocos & Sudipto Bhattacharya & Charles Goodhart & Pojanart Sunirand, 2007. "Banks, relative performance, and sequential contagion," Economic Theory, Springer, vol. 32(2), pages 381-398, August. [Downloadable!] (restricted)
    Other versions:
  3. Corrado, L. & Miller, M. & Zhang, L., 2007. "Bulls, Bears and Excess Volatility: can currency intervention help?," Cambridge Working Papers in Economics 0708, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  4. Veronica Guerrieri & Péter Kondor, 2009. "Fund Managers, Career Concerns, and Asset Price Volatility," NBER Working Papers 14898, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Yolanda Portilla, 2009. "Two-sided career concern and financial equilibrium," Economics Working Papers we091207, Universidad Carlos III, Departamento de Economía. [Downloadable!]
Statistics
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This page was last updated on 2009-12-8.


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