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Relative Performance Equilibrium in Financial Markets

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  • Palomino, F.A.

    (Tilburg University, Center for Economic Research)

Abstract

Money management is an activity in which agents are often evaluated on the basis of their relative performance. In this article we consider an oligopolistic market in which some informed fund managers aim at maximizing their relative performance, rather than their absolute performance. First, we define a Relative Performance Equilibrium and derive conditions for the existence of such an equilibrium. Secondly, we analyse equilibrium trading strategies. We show that the relative performance evaluation provides incentives to play overly risky strategies, i.e. in equilibrium, and fund managers choose riskier portfolios than they would do if they were maximizing their absolute performance. One of the positive consequences is a higher level of informational efficiency.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1997-99.

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Date of creation: 1997
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Handle: RePEc:dgr:kubcen:199799

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Web page: http://center.uvt.nl

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  1. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
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Cited by:
  1. Palomino, F.A. & Prat, A., 1998. "Dynamic Incentives in the Money Management Tournament," Discussion Paper 1998-107, Tilburg University, Center for Economic Research.
  2. Alexander Guembel, 2001. "Emerging Markets and Entry by Actively Managed Funds," Economics Series Working Papers 2001-FE-12, University of Oxford, Department of Economics.

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