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Two-sided career concern and financial equilibrium

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  • Yolanda Portilla

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Abstract

This brief paper constructs a model of delegated portfolio management in which two agency relationships are characterized. First, a delegation process from investors to fund companies, and second, a delegation from fund companies to fund managers. Career concerns of both agents lead to a churning equilibrium in which uninformed managers trade noisily, and uninformed fund companies are willing to hire these uninformed managers. This equilibrium delivers non-fully informative prices and a positive and high trading volume. Our model then strengths previous explanations to the trade puzzle, predicting an increasing trade activity as long as institutional investors with intense delegation play an increasing role in financial markets.

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File URL: http://e-archivo.uc3m.es/bitstream/10016/3775/5/we091207.pdf
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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we091207.

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Date of creation: Mar 2009
Date of revision:
Handle: RePEc:cte:werepe:we091207

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Related research

Keywords: Career concern; Financial equilibrium; Trade puzzle;

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  1. James Dow & Gary Gorton, 1994. "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Center for Financial Institutions Working Papers 95-10, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. 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.
  3. Prat, Andrea & Dasgupta, Amil, 2006. "Financial equilibrium with career concerns," Theoretical Economics, Econometric Society, vol. 1(1), pages 67-93, March.
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