Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management
AbstractThe investment of the ECB reserves in US dollars and yen, delegated to a network of portfolio managers in the Eurosystem’s national central banks, involves a periodic assessment of performance against a common benchmark, controlled by the ECB and subject to revision on a monthly basis. Monetary reward for the best performers is almost entirely absent, and compensation comes mainly as reputational credit following the transmission of the annual report to the Governing Council. Employing a new data set on individual portfolio variables during 2002-2009, we study this peculiar tournament and show the existence of risk-shifting behaviour by reserve managers related to their year-to-date ranking: interim losers increase relative risk in the second half of the year, in the same way as mutual fund managers. In the dollar case, risk-shifting is asymmetric: the adjustment to ranking is generally reduced or entirely offset if reserve managers have achieved a positive interim performance against the benchmark. Yen reserve managers that rank low show a tendency to increase effort, as proxied by portfolio turnover. We also find that reserve managers who ranked low in the previous year tend to reduce risk significantly. Our evidence is consistent with a reserve managers’ anecdote, according to which they obtain a concave reputational reward within their national central banks, which induces risk aversion and explains the observed low usage of the risk budget. Since reserve managers should have a comparative advantage over the tactical benchmark within a monthly horizon, possible enhancements to the design of the tournament are discussed. These might involve an increased reward for effort and performance by means of a convex scoring system linked to monthly, rather than annual, performance. JEL Classification: G11, E58, D81
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 European Central Bank in its series Working Paper Series with number 1377.
Date of creation: Sep 2011
Date of revision:
Contact details of provider:
Postal: Postfach 16 03 19, Frankfurt am Main, Germany
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/home/html/index.en.html
More information through EDIRC
Postal: Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
Other versions of this item:
- Antonio Scalia & Benjamin Sahel, 2012. "Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management," Temi di discussione (Economic working papers) 840, Bank of Italy, Economic Research and International Relations Area.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-16 (All new papers)
- NEP-CBA-2011-09-16 (Central Banking)
- NEP-MON-2011-09-16 (Monetary Economics)
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.:
- Basak, Suleyman & Pavlova, Anna & Shapiro, Alex, 2006.
"Optimal Asset Allocation and Risk Shifting in Money Management,"
CEPR Discussion Papers
5524, C.E.P.R. Discussion Papers.
- Suleyman Basak & Anna Pavlova & Alexander Shapiro, 2007. "Optimal Asset Allocation and Risk Shifting in Money Management," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1583-1621, 2007 21.
- Goriaev, Alexei & Nijman, Theo E. & Werker, Bas J. M., 2005.
"Yet another look at mutual fund tournaments,"
Journal of Empirical Finance,
Elsevier, vol. 12(1), pages 127-137, January.
- Basak, Suleyman & Makarov, Dmitry, 2012.
"Difference in interim performance and risk taking with short-sale constraints,"
Journal of Financial Economics,
Elsevier, vol. 103(2), pages 377-392.
- Suleyman Basak & Dmitry Makarov, 2010. "Difference in Interim Performance and Risk Taking with Short-sale Constraints," Working Papers w0159, Center for Economic and Financial Research (CEFIR).
- Basak, Suleyman & Makarov, Dmitry, 2010. "Difference in Interim Performance and Risk Taking with Short-Sale Constraints," CEPR Discussion Papers 8072, C.E.P.R. Discussion Papers.
- 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.
- Goriaev, A.P. & Palomino, F.A. & Prat, A., 2000. "Mutual Fund Tournament: Risk Taking Incentives Induced by Ranking Objectives," Discussion Paper 2000-94, Tilburg University, Center for Economic Research.
- 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.
- 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.
- Stracca, Livio, 2005.
"Delegated portfolio management: a survey of the theoretical literature,"
Working Paper Series
0520, European Central Bank.
- Livio Stracca, 2006. "Delegated Portfolio Management: A Survey Of The Theoretical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 823-848, December.
- Alexander Kempf & Stefan Ruenzi, 2008.
"Tournaments in Mutual-Fund Families,"
Review of Financial Studies,
Society for Financial Studies, vol. 21(2), pages 1013-1036, April.
- Kempf, Alexander & Ruenzi, Stefan & Thiele, Tanja, 2008.
"Employment risk, compensation incentives and managerial risk taking: Evidence from the mutual fund industry,"
CFR Working Papers
07-02, University of Cologne, Centre for Financial Research (CFR).
- Kempf, Alexander & Ruenzi, Stefan & Thiele, Tanja, 2009. "Employment risk, compensation incentives, and managerial risk taking: Evidence from the mutual fund industry," Journal of Financial Economics, Elsevier, vol. 92(1), pages 92-108, April.
- Florian Ederer, 2010. "Feedback and Motivation in Dynamic Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 733-769, 09.
- Ehrenberg, Ronald G & Bognanno, Michael L, 1990.
"Do Tournaments Have Incentive Effects?,"
Journal of Political Economy,
University of Chicago Press, vol. 98(6), pages 1307-24, December.
- Bindseil,Ulrich & Gonzalez,Fernando & Tabakis,Evangelos (ed.), 2009. "Risk Management for Central Banks and Other Public Investors," Cambridge Books, Cambridge University Press, number 9780521518567, November.
- Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2009.
"Risk Shifting and Mutual Fund Performance,"
NBER Working Papers
14903, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications).
If references are entirely missing, you can add them using this form.