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Delegated portfolio management: a survey of the theoretical literature

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  • Stracca, Livio

Abstract

This paper provides a selective review of the theoretical literature on delegated portfolio management as a principal-agent relationship. The main focus of the paper is to review the analytical issues raised by the peculiar nature of the delegated portfolio management relationship within the broader class of principalagent models. In particular, the paper discusses the performance of linear vs. nonlinear compensation contracts in a single-period setting, the possible effects of limited liability of portfolio managers, the role of reputational concerns in a multiperiod framework, and the incentives to noise trading. In addition, the paper deals with some general equilibrium dimensions and asset pricing implications of delegated portfolio management. The paper also suggests some directions for future research. JEL Classification: D82, G11

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0520.

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Date of creation: Sep 2005
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Handle: RePEc:ecb:ecbwps:20050520

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Related research

Keywords: adverse selection; agency; Delegated portfolio management; Moral Hazard; principal-agent models;

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References

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  1. William N. Goetzmann & Jonathan Ingersoll, Jr. & Stephen A. Ross, 1998. "High Water Marks," NBER Working Papers 6413, National Bureau of Economic Research, Inc.
  2. Bhattacharya, S., 1999. "Delegated Portfolio Management, No Churning, and Relative Performance-Based Incentive/Sorting Schemes," Papers 99-22, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
  3. James Dow & Gary Gorton, . "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Rodney L. White Center for Financial Research Working Papers 19-94, Wharton School Rodney L. White Center for Financial Research.
  4. 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.
  5. Almazan, Andres & Brown, Keith C. & Carlson, Murray & Chapman, David A., 2004. "Why constrain your mutual fund manager?," Journal of Financial Economics, Elsevier, vol. 73(2), pages 289-321, August.
  6. Susan E. K. Christoffersen, 2001. "Why Do Money Fund Managers Voluntarily Waive Their Fees?," Journal of Finance, American Finance Association, vol. 56(3), pages 1117-1140, 06.
  7. Allen, Franklin & Gorton, Gary, 1993. "Churning Bubbles," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 813-36, October.
  8. Alex Shapiro & Suleyman Basak & Anna Pavlova, 2004. "Offsetting the Incentives: Risk Shifting and Benefits of Benchmarking in Money Management," Econometric Society 2004 North American Winter Meetings 583, Econometric Society.
  9. Judith Chevalier & Glenn Ellison, 1998. "Career Concerns of Mutual Fund Managers," NBER Working Papers 6394, National Bureau of Economic Research, Inc.
  10. Jennifer Carpenter, 1999. "Does Option Compensation Increase Managerial Risk Appetite?," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-076, New York University, Leonard N. Stern School of Business-.
  11. Edwin J. Elton & Martin J. Gruber & Christopher R. Blake, 2003. "Incentive Fees and Mutual Funds," Journal of Finance, American Finance Association, vol. 58(2), pages 779-804, 04.
  12. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1990. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," NBER Working Papers 3250, National Bureau of Economic Research, Inc.
  13. Jennifer N. Carpenter, 2000. "Does Option Compensation Increase Managerial Risk Appetite?," Journal of Finance, American Finance Association, vol. 55(5), pages 2311-2331, October.
  14. Christian Gollier & Pierre-François Koehl & Jean-Charles Rochet, 1996. "Risk-Taking Behavior with Limited Liability and Risk Aversion," Center for Financial Institutions Working Papers 96-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
  15. 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.
  16. Chen, Hsiu-lang & Pennacchi, George G., 2009. "Does Prior Performance Affect a Mutual Fund’s Choice of Risk? Theory and Further Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(04), pages 745-775, August.
  17. Eitan Goldman & Steve L. Slezak, 2003. "Delegated Portfolio Management and Rational Prolonged Mispricing," Journal of Finance, American Finance Association, vol. 58(1), pages 283-311, 02.
  18. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
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Citations

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Cited by:
  1. Gino Loyola & Yolanda Portilla, 2010. "Esquemas de Incentivos y Carteras de Inversión Innovadoras," Estudios de Economia, University of Chile, Department of Economics, vol. 37(1 Year 20), pages 43-66, June.
  2. Anne Lavigne, 2006. "Gouvernance et investissement des fonds de pension privés aux Etats-Unis," Working Papers halshs-00081401, HAL.
  3. Scalia, Antonio & Sahel, Benjamin, 2011. "Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management," Working Paper Series 1377, European Central Bank.
  4. Cuoco, Domenico & Kaniel, Ron, 2009. "Equilibrium Prices in the Presence of Delegated Portfolio Management," CEPR Discussion Papers 7453, C.E.P.R. Discussion Papers.
  5. 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.
  6. Jules H. van Binsbergen & Michael W. Brandt & Ralph S.J. Koijen, 2006. "Optimal Decentralized Investment Management," NBER Working Papers 12144, National Bureau of Economic Research, Inc.
  7. Eduardo Walker, 2008. "Assessing Alternative Institutional Designs For Investment Regulation In Defined Contribution Pension Funds," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 11(2), pages 121-152.
  8. Guido Maretto, 2011. "Contracts and Market: Risk Sharing with Hidden Types," Working Papers ECARES ECARES 2011-005, ULB -- Universite Libre de Bruxelles.
  9. 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.
  10. Andersson, Ola & Holm, Håkan J. & Tyran, Jean-Robert & Wengström, Erik, 2013. "Risking Other People’s Money: Experimental Evidence on Bonus Schemes, Competition, and Altruism," Working Paper Series 989, Research Institute of Industrial Economics.
  11. repec:pdn:wpaper:76 is not listed on IDEAS
  12. Sheng, Jiliang & Wang, Xiaoting & Yang, Jun, 2012. "Incentive contracts in delegated portfolio management under VaR constraint," Economic Modelling, Elsevier, vol. 29(5), pages 1679-1685.
  13. Natasa Bilkic & Thomas Gries, 2014. "Destructive Agents, Finance Firms, and Systemic Risk," Working Papers CIE 76, University of Paderborn, CIE Center for International Economics.
  14. Raphaëlle Bellando & Sébastien Ringuedé, 2009. "Compétition entre fonds et prise de risque excessive : une application empirique au cas français," Working Papers halshs-00451027, HAL.

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