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Financial equilibrium with career concerns

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Author Info

  • Prat, Andrea

    () (LSE)

  • Dasgupta, Amil

    () (LSE)

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/viewFile/20060067/447/11
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Bibliographic Info

Article provided by Econometric Society 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

Related research

Keywords: Career concerns; financial equilibrium; trade volume;

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Cited by:
  1. Citci, Haluk & Inci, Eren, 2012. "The Masquerade Ball of the CEOs and the Mask of Excessive Risk," MPRA Paper 35979, University Library of Munich, Germany.
  2. Sudipto Bhattacharya & Charles Goodhart & Dimitrios Tsomocos & Alexandros Vardoulakis, 2011. "Minsky’s Financial Instability Hypothesis and the Leverage Cycle," FMG Special Papers sp202, Financial Markets Group.
  3. 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.
  4. Amil Dasgupta & Andrea Prat & Michela Verardo, 2010. "Institutional Trade Persistence and Long-term Equity Returns," FMG Discussion Papers dp661, Financial Markets Group.
  5. 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.
  6. Xiangbo Liu & Zijun Liu & Zhigang Qiu, 2013. "Stock Market Manipulation in the Presence of Fund Flows," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 481-489, November.
  7. Veronica Guerrieri & Peter Kondor, 2010. "Fund managers, career concerns, and asset price volatility," Staff Report 446, Federal Reserve Bank of Minneapolis.
  8. Yolanda Portilla, 2009. "Two-sided career concern and financial equilibrium," Economics Working Papers we091207, Universidad Carlos III, Departamento de Economía.
  9. Gregory DeCoster & William Strange, 2012. "Developers, Herding, and Overbuilding," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 7-35, January.

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