Advanced Search
MyIDEAS: Login to save this paper or follow this series

Optimal Decentralized Investment Management

Contents:

Author Info

  • Jules H. van Binsbergen
  • Michael W. Brandt
  • Ralph S.J. Koijen

Abstract

We study a decentralized investment problem in which a CIO employs multiple asset managers to implement and execute investment strategies in separate asset classes. The CIO allocates capital to the managers who, in turn, allocate these funds to the assets in their asset class. This two-step investment process causes several misalignments of objectives between the CIO and his managers and can lead to large utility costs on the part of the CIO. We focus on i) loss of diversification ii) different appetites for risk, iii) different investment horizons, and iv) the presence of liabilities. We derive an optimal unconditional linear performance benchmark and show that this benchmark can be used to better align incentives within the firm. The optimal benchmark substantially mitigates the utility costs of decentralized investment management. These costs can be further reduced when the CIO can screen asset managers on the basis of their risk appetites. Each manager%u2019s optimal level of risk aversion depends on the asset class he manages and can differ substantially from the CIO%u2019s level of risk aversion.

Download Info

If 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.
File URL: http://www.nber.org/papers/w12144.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12144.

as in new window
Length:
Date of creation: Apr 2006
Date of revision:
Publication status: published as van Binsbergen, Jules H., Michael W. Brandt, and Ralph S.J. Koijen, Optimal Decentralized Investment Managament, Journal of Finance 63(4) (2008): 1849-1895.
Handle: RePEc:nbr:nberwo:12144

Note: AP
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Kim, Tong Suk & Omberg, Edward, 1996. "Dynamic Nonmyopic Portfolio Behavior," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 9(1), pages 141-61.
  2. Ait-Sahalia, Y. & Brandt, M.W., 2001. "Variable Selection for Portfolio Choice," Papers, Manitoba - Department of Economics 34, Manitoba - Department of Economics.
  3. John H. Cochrane & Monika Piazzesi, 2005. "Bond Risk Premia," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 138-160, March.
  4. Stracca, Livio, 2005. "Delegated portfolio management: a survey of the theoretical literature," Working Paper Series, European Central Bank 0520, European Central Bank.
  5. Chan, Yeung Lewis & Viceira, Luis & Campbell, John, 2003. "A Multivariate Model of Strategic Asset Allocation," Scholarly Articles 3163263, Harvard University Department of Economics.
  6. Campbell, John & Vuolteenaho, Tuomo, 2004. "Bad Beta, Good Beta," Scholarly Articles 3122489, Harvard University Department of Economics.
  7. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, American Finance Association, vol. 55(1), pages 225-264, 02.
  8. John Y. Campbell & Luis M. Viceira, 1996. "Consumption and Portfolio Decisions When Expected Returns are Time Varying," NBER Working Papers 5857, National Bureau of Economic Research, Inc.
  9. Basak, Suleyman & Pavlova, Anna & Shapiro, Alex, 2003. "Offsetting the Incentives: Risk Shifting and Benefits of Benchmarking in Money Management," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 4303-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  10. Wachter, Jessica A., 2002. "Portfolio and Consumption Decisions under Mean-Reverting Returns: An Exact Solution for Complete Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 37(01), pages 63-91, March.
  11. Jakub W. Jurek & Luis M. Viceira, 2006. "Optimal Value and Growth Tilts in Long-Horizon Portfolios," NBER Working Papers 12017, National Bureau of Economic Research, Inc.
  12. Barry, Christopher B & Starks, Laura T, 1984. " Investment Management and Risk Sharing with Multiple Managers," Journal of Finance, American Finance Association, American Finance Association, vol. 39(2), pages 477-91, June.
  13. Dessein, Wouter & Garicano, Luis & Gertner, Robert, 2007. "Organizing for Synergies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6019, C.E.P.R. Discussion Papers.
  14. Stutzer, Michael, 2003. "Portfolio choice with endogenous utility: a large deviations approach," Journal of Econometrics, Elsevier, Elsevier, vol. 116(1-2), pages 365-386.
  15. Sid Browne, 2000. "Risk-Constrained Dynamic Active Portfolio Management," Management Science, INFORMS, INFORMS, vol. 46(9), pages 1188-1199, September.
  16. Juan-Pedro Gomez & Fernando Zapatero, 2003. "Asset pricing implications of benchmarking: a two-factor CAPM," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(4), pages 343-357.
  17. Michael W. Brandt, 1999. "Estimating Portfolio and Consumption Choice: A Conditional Euler Equations Approach," Journal of Finance, American Finance Association, American Finance Association, vol. 54(5), pages 1609-1645, October.
  18. Sharpe, W F, 1981. "Decentralized Investment Management," Journal of Finance, American Finance Association, American Finance Association, vol. 36(2), pages 217-34, May.
  19. Jakša Cvitanić & Ali Lazrak & Lionel Martellini & Fernando Zapatero, 2006. "Dynamic Portfolio Choice with Parameter Uncertainty and the Economic Value of Analysts' Recommendations," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 19(4), pages 1113-1156.
  20. Campbell, John Y. & Yogo, Motohiro, 2006. "Efficient tests of stock return predictability," Journal of Financial Economics, Elsevier, Elsevier, vol. 81(1), pages 27-60, July.
  21. Lewellen, Jonathan, 2004. "Predicting returns with financial ratios," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(2), pages 209-235, November.
  22. Treynor, Jack L & Black, Fischer, 1973. "How to Use Security Analysis to Improve Portfolio Selection," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 46(1), pages 66-86, January.
  23. Walter Torous & Rossen Valkanov & Shu Yan, 2004. "On Predicting Stock Returns with Nearly Integrated Explanatory Variables," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 77(4), pages 937-966, October.
  24. Brennan, Michael J., 1993. "Agency and Asset Pricing," University of California at Los Angeles, Anderson Graduate School of Management, Anderson Graduate School of Management, UCLA qt53k014sd, Anderson Graduate School of Management, UCLA.
  25. Antonios Sangvinatsos & Jessica A. Wachter, 2003. "Does the Failure of the Expectations Hypothesis Matter for Long-Term Investors," NBER Working Papers 10086, National Bureau of Economic Research, Inc.
  26. Jennifer N. Carpenter, 2000. "Does Option Compensation Increase Managerial Risk Appetite?," Journal of Finance, American Finance Association, American Finance Association, vol. 55(5), pages 2311-2331, October.
  27. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
  28. Tepla, Lucie, 2000. "Optimal portfolio policies with borrowing and shortsale constraints," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 24(11-12), pages 1623-1639, October.
  29. Jennifer Carpenter, 1999. "Does Option Compensation Increase Managerial Risk Appetite?," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 99-076, New York University, Leonard N. Stern School of Business-.
  30. Admati, Anat R & Pfleiderer, Paul, 1997. "Does It All Add Up? Benchmarks and the Compensation of Active Portfolio Managers," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 70(3), pages 323-50, July.
  31. Brennan, Michael J. & Schwartz, Eduardo S. & Lagnado, Ronald, 1997. "Strategic asset allocation," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(8-9), pages 1377-1403, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Arijit Mukherjee & Luis Vasconcelos, 2011. "Optimal job design in the presence of implicit contracts," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 42(1), pages 44-69, 03.
  2. Suleyman Basak & Dmitry Makarov, 2014. "Strategic Asset Allocation in Money Management," Journal of Finance, American Finance Association, American Finance Association, vol. 69(1), pages 179-217, 02.
  3. Zhiguo He & Wei Xiong, 2008. "Delegated Asset Management, Investment Mandates, and Capital Immobility," NBER Working Papers 14574, National Bureau of Economic Research, Inc.
  4. de Groot, Wilma & Pang, Juan & Swinkels, Laurens, 2012. "The cross-section of stock returns in frontier emerging markets," Journal of Empirical Finance, Elsevier, Elsevier, vol. 19(5), pages 796-818.
  5. Sheng, Jiliang & Wang, Jian & Wang, Xiaoting & Yang, Jun, 2014. "Asymmetric contracts, cash flows and risk taking of mutual funds," Economic Modelling, Elsevier, Elsevier, vol. 38(C), pages 435-442.
  6. Jules H. van Binsbergen & Michael W. Brandt, 2007. "Optimal Asset Allocation in Asset Liability Management," NBER Working Papers 12970, National Bureau of Economic Research, Inc.
  7. Lim, Andrew E.B. & Wong, Bernard, 2010. "A benchmarking approach to optimal asset allocation for insurers and pension funds," Insurance: Mathematics and Economics, Elsevier, vol. 46(2), pages 317-327, April.
  8. Alexander, Gordon J. & Baptista, Alexandre M., 2010. "Active portfolio management with benchmarking: A frontier based on alpha," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(9), pages 2185-2197, September.
  9. Dass, Nishant & Nanda, Vikram & Wang, Qinghai, 2013. "Allocation of decision rights and the investment strategy of mutual funds," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(1), pages 254-277.
  10. Agarwal, Vikas & Nada, Vikram & Ray, Sugata, 2013. "Institutional investment and intermediation in the hedge fund industry," CFR Working Papers, University of Cologne, Centre for Financial Research (CFR) 13-03, University of Cologne, Centre for Financial Research (CFR).
  11. Alexander, Gordon J. & Baptista, Alexandre M., 2011. "Portfolio selection with mental accounts and delegation," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(10), pages 2637-2656, October.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:12144. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.