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 prices systematically deviating from fundamentals with limits to arbitraging this differential. Managerial compensation contracts, optimal at the firm level, may lead to inefficiencies at the macroeconomic level. We identify conditions when shocks in one emerging market affect others.
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Bibliographic InfoPaper provided by EconWPA in its series International Finance with number 0408003.
Length: 47 pages
Date of creation: 16 Aug 2004
Date of revision:
Note: Type of Document - pdf; pages: 47
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Financial Crises; Index Investors; Global Linkages;
Other versions of this item:
- Sujit Chakravorti & Anna Ilyina & Subir Lall, 2003. "Managerial incentives and financial contagion," Working Paper Series WP-03-21, Federal Reserve Bank of Chicago.
- Sujit Chakravorti & Subir Lall, 2004. "Managerial Incentives and Financial Contagion," IMF Working Papers 04/199, International Monetary Fund.
- 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-2004-08-23 (All new papers)
- NEP-CFN-2004-08-23 (Corporate Finance)
- NEP-FIN-2004-08-23 (Finance)
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