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Mutual Fund Tournament: Risk Taking Incentives Induced By Ranking Objectives

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Author Info
Goriaev, Alexei P.
Palomino, Frédéric
Prat, Andrea

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Abstract

There is now extensive empirical evidence showing that fund managers have relative performance objectives and adapt their investment strategy in the last part of the calendar year to balance their performance in the early part of the year. However, emphasis was put on returns in excess of some exogenous benchmark return. In this Paper, we investigate whether fund managers have ranking objectives (as in a tournament). First, in a two-period model, we analyse the game played by two risk-neutral fund managers with ranking objectives. We show that ranking objectives provide incentives for an interim loser to increase risk in the last part of the year. In the second part of the Paper, we test some predictions of the model. We find evidence that funds ranked in the top decile after the first part of the year have risk incentives generated by ranking objectives and that risk induced by ranking objectives is mainly systematic.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2794.

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Date of creation: May 2001
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Handle: RePEc:cpr:ceprdp:2794

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Related research
Keywords: Interim Performance; Ranking-Based Objectives; Risk-Taking Incentives;

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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.:

  1. Meyer, Margaret A & Vickers, John, 1995. "Performance Comparisons and Dynamic Incentives," CEPR Discussion Papers 1107, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Khorana, Ajay, 1996. "Top management turnover An empirical investigation of mutual fund managers," Journal of Financial Economics, Elsevier, vol. 40(3), pages 403-427, March. [Downloadable!] (restricted)
  3. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
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  4. Huddart, Steven, 1999. "Reputation and performance fee effects on portfolio choice by investment advisers1," Journal of Financial Markets, Elsevier, vol. 2(3), pages 227-271, August. [Downloadable!] (restricted)
  5. Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law & Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
  6. Hvide, H.K., 1999. "Tournament Rewards and Risk Taking," Papers 32-99, Tel Aviv.
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  7. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Alexander Kempf & Stefan Ruenzi, 2004. "Tournaments in Mutual Fund Families," Finance 0404011, EconWPA. [Downloadable!]
    Other versions:
  2. Gyongyi Loranth & Emanuela Sciubba, 2006. "Relative Performance, Risk and Entry in the Mutual Fund Industry," Topics in Economic Analysis & Policy, Berkeley Electronic Press, vol. 6(1), pages 1540-1540. [Downloadable!] (restricted)
    Other versions:
  3. F. Palomino & H. Uhlig, . "Should smart investors buy funds with high returns in the past?," Sonderforschungsbereich 373 2002-28, Humboldt Universitaet Berlin.
    Other versions:
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