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

Portfolio delegation under short-selling constraints

Contents:

Author Info

  • Juan-Pedro Gómez
  • Tridib Sharma

Abstract

In this paper we study delegated portfolio management when the manager's ability to short-sell is restricted. Contrary to previous results, we show that under moral hazard, linear performance-adjusted contracts do provide portfolio managers with incentives to gather information. The risk-averse manager's optimal effort is an increasing function of her share in the portfolio's return. This result affects the risk-averse investor's optimal contract decision. The first best, purely risk-sharing contract is proved to be suboptimal. Using numerical methods we show that the manager's share in the portfolio return is higher than the „rst best share. Additionally, this deviation is shown to be: (i) increasing in the manager's risk aversion and (ii) larger for tighter short-selling restrictions. When the constraint is relaxed the optimal contract converges towards the first best risk sharing contract.

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.econ.upf.edu/docs/papers/downloads/695.pdf
File Function: Whole Paper
Download Restriction: no

Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 695.

as in new window
Length:
Date of creation: Jun 2003
Date of revision:
Handle: RePEc:upf:upfgen:695

Contact details of provider:
Web page: http://www.econ.upf.edu/

Related research

Keywords: Third best effort; linear performance-adjusted contracts; short-selling constraints;

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. Mark Grinblatt & Sheridan Titman, . "Adverse Risk Incentives and the Design of Performance-Based Contracts," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 21-88, Wharton School Rodney L. White Center for Financial Research.
  2. Jennifer Koski & Jeffrey Pontiff, 1996. "How Are Derivatives Used? Evidence from the Mutual Fund Industry," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 96-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
  3. Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc.
  4. Sanjiv Ranjan Das & Rangarajan K. Sundaram, 1998. "On the Regulation of Fee Structures in Mutual Funds," NBER Working Papers 6639, National Bureau of Economic Research, Inc.
  5. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  6. Starks, Laura T., 1987. "Performance Incentive Fees: An Agency Theoretic Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 17-32, March.
  7. Heinkel, Robert & Stoughton, Neal M, 1994. "The Dynamics of Portfolio Management Contracts," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 351-87.
  8. Philip H. Dybvig & Heber K. Farnsworth & Jennifer Carpenter, 1999. "Portfolio Performance and Agency," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 99-046, New York University, Leonard N. Stern School of Business-.
  9. Almazan, Andres & Brown, Keith C. & Carlson, Murray & Chapman, David A., 2004. "Why constrain your mutual fund manager?," Journal of Financial Economics, Elsevier, Elsevier, vol. 73(2), pages 289-321, August.
  10. William N. Goetzmann & Jonathan E. Ingersoll, Jr. & Stephen A. Ross, 2004. "High Water Marks," Yale School of Management Working Papers, Yale School of Management ysm22, Yale School of Management.
  11. Mark Grinblatt & Sheridan Titman, 1989. "Adverse Risk Incentives and the Design of Performance-Based Contracts," Management Science, INFORMS, INFORMS, vol. 35(7), pages 807-822, July.
  12. Susan I. Cohen & Laura T. Starks, 1988. "Estimation Risk and Incentive Contracts for Portfolio Managers," Management Science, INFORMS, INFORMS, vol. 34(9), pages 1067-1079, September.
  13. Sanjiv Ranjan Das & Rangarajan K. Sundaram, 1999. "Fee Speech: Signalling and the Regulation of Mutual Fund Fees," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 99-085, New York University, Leonard N. Stern School of Business-.
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. Sheng, Jiliang & Wang, Xiaoting & Yang, Jun, 2012. "Incentive contracts in delegated portfolio management under VaR constraint," Economic Modelling, Elsevier, vol. 29(5), pages 1679-1685.
  2. Alexander, Gordon J. & Baptista, Alexandre M., 2011. "Portfolio selection with mental accounts and delegation," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2637-2656, October.
  3. Agarwal, Vikas & Gómez, Juan-Pedro & Priestley, Richard, 2012. "Management compensation and market timing under portfolio constraints," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(10), pages 1600-1625.
  4. Basak, Suleyman & Pavlova, Anna & Shapiro, Alexander, 2008. "Offsetting the implicit incentives: Benefits of benchmarking in money management," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1883-1893, September.
  5. Wang, Jian & Sheng, Jiliang & Yang, Jun, 2013. "Optimism bias and incentive contracts in portfolio delegation," Economic Modelling, Elsevier, vol. 33(C), pages 493-499.
  6. Sheng, Jiliang & Wang, Jian & Wang, Xiaoting & Yang, Jun, 2014. "Asymmetric contracts, cash flows and risk taking of mutual funds," Economic Modelling, Elsevier, vol. 38(C), pages 435-442.

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:upf:upfgen:695. 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.