Front-running by Mutual Fund Managers: It ain't that Bad
AbstractThis paper evaluates the welfare implications of front-running by mutual fund managers. It extends the model of Kyle (1985) to a situation in which the insider with fundamentals-information competes against an insider with trade-information and in which noise trading is endogenized. Noise traders are small investors trading through mutual funds to hedge non-tradable or illiquid assets. The insider with trade-information is one of the fund managers. We find that front-running activity reduces their customers’ liquidity costs, but it also reduces their hedging benefits. As a result, the customers of the front-running manager may be worse off and place smaller orders. The opposite is true, for those investors who are not subject to front-running, however. In aggregate, front-running will either have no effect, or have a positive effect on welfare.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1528.
Date of creation: Dec 1996
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Other versions of this item:
- Danthine, J-P & Moresi, S, 1996. "Front-Running by Mutual Fund Managers : It Ain't That bad," Papers 96-21, Columbia - Graduate School of Business.
- Jean-Pierre DANTHINE & Serge MORESI, 1996. "Front-Running by Mutual Fund Managers : It Ain't That Bad," Cahiers de Recherches Economiques du DÃ©partement d'EconomÃ©trie et d'Economie politique (DEEP) 9618, Université de Lausanne, Faculté des HEC, DEEP.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
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