Financial equilibrium with career concerns
AbstractWhat 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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Bibliographic InfoArticle provided by Econometric Society in its journal Theoretical Economics.
Volume (Year): 1 (2006)
Issue (Month): 1 (March)
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Web page: http://econtheory.org
Career concerns; financial equilibrium; trade volume;
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- G0 - Financial Economics - - General
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
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