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Delegated Portfolio Management and Risk Taking Behavior

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  • José Luiz Barros Fernandes
  • Juan Ignacio Peña
  • Benjamin Miranda Tabak

Abstract

Standard models of moral hazard predict a negative relationship between risk and incentives; however empirical studies on mutual funds present mixed results. In this paper, we propose a behavioral principal-agent model in the context of professional managers, focusing on active and passive investment strategies. Using this general framework, we evaluate how incentives affect the risk taking behavior of managers, using the standard moral hazard model as a special case; and solve the previous contradiction. Empirical evidence, based on a comprehensive world sample of 4584 mutual funds, gives support to our theoretical model.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps199.pdf
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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 199.

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Date of creation: Dec 2009
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Handle: RePEc:bcb:wpaper:199

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Web page: http://www.bcb.gov.br/?english

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