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Relative Performance Evaluation Contracts and Asset Market Equilibrium

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  • Kapur, Sandeep
  • Timmermann, Allan G

Abstract

We analyse the equilibrium consequences of performance-based contracts for fund managers. Managerial remuneration is tied to a fund's absolute performance and its performance relative to rival funds. Investors choose whether or not to delegate their investment to better-informed fund managers; if they delegate they choose the parameters of the optimal contract subject to the fund manager's participation constraint. We find that the impact of relative performance evaluation on equilibrium equity premium and on portfolio-herding critically depends on whether the participation constraint is binding. Simple numerical examples suggest that the increased importance of delegation and performance evaluation may lower the equity premium.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4038.

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Date of creation: Sep 2003
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Handle: RePEc:cpr:ceprdp:4038

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Keywords: equity premium; portfolio delegation; relative performance evaluation;

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References

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Citations

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Cited by:
  1. Thomas P. Gehrig & Torben Lütje & Lukas Menkhoff, 2009. "Bonus Payments and Fund Managers' Behavior: Transatlantic Evidence," CESifo Economic Studies, CESifo, vol. 55(3-4), pages 569-594.
  2. Cuoco, Domenico & Kaniel, Ron, 2011. "Equilibrium prices in the presence of delegated portfolio management," Journal of Financial Economics, Elsevier, vol. 101(2), pages 264-296, August.
  3. Luis Opazo & Claudio Raddatz & Sergio L Schmukler, 2010. "The Long and the Short of Emerging Market Debt," Working Papers 42, Superintendencia de Pensiones, revised Jun 2010.
  4. Premachandra, I.M. & Zhu, Joe & Watson, John & Galagedera, Don U.A., 2012. "Best-performing US mutual fund families from 1993 to 2008: Evidence from a novel two-stage DEA model for efficiency decomposition," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3302-3317.
  5. Opazo, Luis & Raddatz, Claudio & Schmukler, Sergio L., 2014. "Institutional investors and long-term investment : evidence from Chile," Policy Research Working Paper Series 6922, The World Bank.
  6. Jean-Daniel Guigou & Patrick De Lamirande & Bruno Lovat, 2011. "Strategic delegation and collusion: Do incentive schemes matter?," LSF Research Working Paper Series 11-02, Luxembourg School of Finance, University of Luxembourg.
  7. Blake, David & Timmermann, Allan & Tonks, Ian & Wermers, Russ, 2010. "Decentralized investment management: evidence from the pension fund industry," MPRA Paper 35767, University Library of Munich, Germany.
  8. Cuoco, Domenico & Kaniel, Ron, 2009. "Equilibrium Prices in the Presence of Delegated Portfolio Management," CEPR Discussion Papers 7453, C.E.P.R. Discussion Papers.
  9. Raddatz, Claudio & Schmukler, Sergio L., 2011. "Deconstructing herding : evidence from pension fund investment behavior," Policy Research Working Paper Series 5700, The World Bank.
  10. Liu, Xiangbo & Qiu, Zhigang & Xiong, Yan, 2013. "VaR constrained asset pricing with relative performance," Economics Letters, Elsevier, vol. 121(2), pages 174-178.
  11. Huang, Shiyang & Qiu, Zhigang & Shang, Qi & Tang, Ke, 2013. "Asset pricing with heterogeneous beliefs and relative performance," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4107-4119.

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