Managerial Incentives and Financial Contagion
AbstractThis paper proposes a framework for comovements of asset prices with seemingly unrelated fundamentals, as an outcome of optimal portfolio strategies by fund managers. In emerging markets, dedicated managers outperforming a benchmark index and global managers maximizing absolute returns lead to systematic interactions between asset prices, without asymmetric information. The model determines optimal portfolio weights, the incidence of relative value strategies, and the systematic deviation of prices from fundamentals with limits to arbitraging this differential. Managerial compensation contracts, optimal at the firm level, may lead to inefficiencies at the macroeconomic level. Conditions are identified when shocks in one emerging market affect others.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 04/199.
Date of creation: 01 Oct 2004
Date of revision:
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Other versions of this item:
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-22 (All new papers)
- NEP-FIN-2005-10-22 (Finance)
- NEP-FMK-2005-10-22 (Financial Markets)
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