Mutual Fund Tournament: Risk Taking Incentives Induced by Ranking Objectives
AbstractThere 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 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 analyze the game played by two risk-neutral fund managers with ranking objectives.We derive conditions on the set of possible strategies under which the aggregate amount of risk undertaken in the late period is larger than in the first period.In the second part of the paper, we provide evidence that (i) funds have risk incentives generated by ranking objectives, (ii) risk induced by ranking objectives is mainly idiosyncratic, and (iii) risk incentives generated by ranking objectives are stronger for funds ranked in the top decile after the first part of the year.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2000-94.
Date of creation: 2000
Date of revision:
Contact details of provider:
Web page: http://center.uvt.nl
investment trusts; financial management; financial risk; performance;
Other versions of this item:
- Goriaev, Alexei P. & Palomino, Frédéric & Prat, Andrea, 2001. "Mutual Fund Tournament: Risk Taking Incentives Induced By Ranking Objectives," CEPR Discussion Papers 2794, C.E.P.R. Discussion Papers.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
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.:
- Meyer, Margaret A & Vickers, John, 1997.
"Performance Comparisons and Dynamic Incentives,"
Journal of Political Economy,
University of Chicago Press, vol. 105(3), pages 547-81, June.
- 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.
- Jennifer Lynch Koski & Jeffrey Pontiff, 1999.
"How Are Derivatives Used? Evidence from the Mutual Fund Industry,"
Journal of Finance,
American Finance Association, vol. 54(2), pages 791-816, 04.
- Jennifer Koski & Jeffrey Pontiff, 1996. "How Are Derivatives Used? Evidence from the Mutual Fund Industry," Center for Financial Institutions Working Papers 96-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
- 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.
- Judith A. Chevalier & Glenn D. Ellison, 1995.
"Risk Taking by Mutual Funds as a Response to Incentives,"
NBER Working Papers
5234, National Bureau of Economic Research, Inc.
- 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.
- Chevalier, J. & Ellison, G., 1996. "Risk Taking by Mutual Funds as a Response to Incentives," Working papers 96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
- Hans K. Hvide, 2002.
"Tournament Rewards and Risk Taking,"
Journal of Labor Economics,
University of Chicago Press, vol. 20(4), pages 877-898, October.
- Hans K. Hvide, 2000. "Tournament Rewards and Risk Taking," Econometric Society World Congress 2000 Contributed Papers 0163, Econometric Society.
- Hvide, H.K., 1999. "Tournament Rewards and Risk Taking," Papers 32-99, Tel Aviv.
- 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.
- Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
- Palomino, Frederic, 2005. "Relative performance objectives in financial markets," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 351-375, July.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Broekman).
If references are entirely missing, you can add them using this form.