Advanced Search
MyIDEAS: Login

Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management

Contents:

Author Info

  • Antonio Scalia

    ()
    (Bank of Italy)

  • Benjamin Sahel

    ()
    (European Central Bank)

Abstract

The investment of the ECB reserves in US dollars and yen involves an annual performance assessment of portfolio managers, located in the Eurosystem’s national central banks. Employing new data on individual portfolios during 2002-2009, we study this peculiar tournament and show the existence of risk-shifting behaviour by reserve managers related to their year-to-date ranking: interim losers increase relative risk in the second half of the year, in the same way as mutual fund managers. In the dollar case the adjustment to ranking is reduced or offset if reserve managers have achieved a positive interim performance against the benchmark. Yen reserve managers that rank low show a tendency to increase effort, as proxied by portfolio turnover. Those who ranked low in the previous year tend to reduce risk significantly. Since reserve managers should have a comparative advantage over the benchmark within a monthly horizon, possible enhancements to the design of the tournament might involve an increased reward for effort and performance by means of a convex scoring system linked to monthly, rather than annual, performance.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td12/td840_12/en_td840/en_tema_840.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 840.

as in new window
Length:
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:bdi:wptemi:td_840_12

Contact details of provider:
Postal: Via Nazionale, 91 - 00184 Roma
Web page: http://www.bancaditalia.it
More information through EDIRC

Related research

Keywords: foreign exchange reserves; tournament; incentives; effort; portfolio management;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Basak, Suleyman & Makarov, Dmitry, 2010. "Difference in Interim Performance and Risk Taking with Short-Sale Constraints," CEPR Discussion Papers 8072, C.E.P.R. Discussion Papers.
  2. Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2011. "Risk Shifting and Mutual Fund Performance," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2575-2616.
  3. Ronald G. Ehrenberg & Michael L. Bognanno, 1988. "Do Tournaments Have Incentive Effects?," NBER Working Papers 2638, National Bureau of Economic Research, Inc.
  4. Goriaev, A.P. & Nijman, T.E. & Werker, B.J.M., 2005. "Yet another look at mutual fund tournaments," Open Access publications from Tilburg University urn:nbn:nl:ui:12-167598, Tilburg University.
  5. Kempf, Alexander & Ruenzi, Stefan, 2004. "Tournaments in mutual fund families," CFR Working Papers 04-02, University of Cologne, Centre for Financial Research (CFR).
  6. Jennifer Koski & Jeffrey Pontiff, 1996. "How Are Derivatives Used? Evidence from the Mutual Fund Industry," Center for Financial Institutions Working Papers 96-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
  7. Livio Stracca, 2006. "Delegated Portfolio Management: A Survey Of The Theoretical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 823-848, December.
  8. Goriaev, Alexei P. & Palomino, Frédéric & Prat, Andrea, 2001. "Mutual Fund Tournament: Risk Taking Incentives Induced By Ranking Objectives," CEPR Discussion Papers 2794, C.E.P.R. Discussion Papers.
  9. Bindseil,Ulrich & Gonzalez,Fernando & Tabakis,Evangelos (ed.), 2009. "Risk Management for Central Banks and Other Public Investors," Cambridge Books, Cambridge University Press, number 9780521518567, November.
  10. Florian Ederer, 2010. "Feedback and Motivation in Dynamic Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 733-769, 09.
  11. Kempf, Alexander & Ruenzi, Stefan & Thiele, Tanja, 2008. "Employment risk, compensation incentives and managerial risk taking: Evidence from the mutual fund industry," CFR Working Papers 07-02, University of Cologne, Centre for Financial Research (CFR).
  12. Suleyman Basak & Anna Pavlova & Alexander Shapiro, 2007. "Optimal Asset Allocation and Risk Shifting in Money Management," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1583-1621, 2007 21.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_840_12. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.