Career Concerns in Financial Markets
AbstractWhat are the equilibrium features of a market where a sizeable portion of traders face career concerns? This question is central to our understanding of Þnancial markets that are increasingly dominated by institutional investors. We construct a model of delegated portfolio management that captures key features of the US mutual fund industry and we embed it into an asset pricing set-up. Fund managers differ in their ability to understand market fundamentals, and in every period investors choose a fund. In equilibrium, the presence of career concerns induces uninformed fund managers to churn, i.e. to engage in trading even when they face a negative expected return.� As churning plays the role of noise trading, the asset market displays non-fully informative prices and positive (and high) trading volume.� The equilibrium relationship between fund return and net fund flows displays a skewed shape that is consistent with stylized facts. The robustness of our core results is probed from several angles.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp494.
Date of creation: May 2004
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- Andrea Prat & Amil Dasgupta, 2005. "Reputation and Price Dynamics in Financial Markets," 2005 Meeting Papers 222, Society for Economic Dynamics.
- Amil Dasgupta & Andrea Prat, 2005. "Reputation and Asset Prices: A Theory of Information Cascades and Systematic Mispricing," Levine's Bibliography 784828000000000368, UCLA Department of Economics.
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