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Overconfidence and Delegated Portfolio Management

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  • Palomino, F.A.
  • Sadrieh, A.

    (Tilburg University, Center for Economic Research)

Abstract

Following extensive empirical evidence about market anomalies and overconfidence, the analysis of financial markets with agents overconfident about the precision of their private information has received a lot of attention.However, all these models consider agents trading for their own account.In this article, we analyse a standard delegated portfolio management problem between a financial institution and a money manager who may be of two types: rational or overconfident.We consider several situations.In each case, we derive the optimal contract and results on the performance of financial institution hiring overconfident managers relative to institutions hiring rational agents, and results on the price impact of overconfidence.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2003-54.

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Date of creation: 2003
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Handle: RePEc:dgr:kubcen:200354

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Keywords: portfolio management; financial markets; financial instutions;

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References

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Cited by:
  1. Wang, Jian & Sheng, Jiliang & Yang, Jun, 2013. "Optimism bias and incentive contracts in portfolio delegation," Economic Modelling, Elsevier, vol. 33(C), pages 493-499.

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