Competition in Portfolio Management: Theory and Experiment
AbstractWe develop a new theory of delegated investment whereby managers compete in terms of composition of the portfolios they promise to acquire. We study the resulting asset pricing in the inter-manager market. We incentivize investors so that we obtain sharp predictions. Managers are paid a fixed fraction of fund size. In equilibrium, investors choose managers who offer portfolios that mimic Arrow-Debreu (state) securities. Prices in the inter-manager market are predicted to satisfy a weak version of the CAPM: state-price probability ratios implicit in prices of traded assets decrease in aggregate wealth across states. An experiment involving about one hundred participants over six weeks broadly supports the theoretical predictions. Pricing quality declines, however, when fund concentration increases because funds flow towards managers who offer portfolios closer to Arrow-Debreu securities (as in the theory) and who had better recent performance (an observation unrelated to the theory).
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Bibliographic InfoPaper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 438.
Date of creation: 2012
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-05 (All new papers)
- NEP-CBE-2012-06-05 (Cognitive & Behavioural Economics)
- NEP-EXP-2012-06-05 (Experimental Economics)
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