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Delegated Portfolio Management, Benchmarking, and the Effects on Financial Markets

Author

Listed:
  • Deniz Igan

    (International Monetary Fund)

  • Marcelo Pinheiro

    (Public Company Accounting Oversight Board)

Abstract

We analyze the implications of linking the compensation of fund managers to the return of their portfolio relative to that of a benchmark—a common solution to the agency problem in delegated portfolio management. In the presence of such relative-performance-based objectives, investors have reduced expected utility but markets are typically more informative and deeper. Furthermore, in a multiple asset/market framework we show that (i) relative performance concerns lead to financial contagion; (ii) benchmark inclusion increases price volatility; (iii) home bias emerges as a rational outcome. When information is costly, information acquisition is hindered and this attenuates the effects on informativeness and depth of the market.

Suggested Citation

  • Deniz Igan & Marcelo Pinheiro, 2016. "Delegated Portfolio Management, Benchmarking, and the Effects on Financial Markets," Journal of Financial Transformation, Capco Institute, vol. 43, pages 144-157.
    • Handle: RePEc:ris:jofitr:1564
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    Cited by:

    1. Riccardo Lucchetti & Mihaela Nicolau & Giulio Palomba & Luca Riccetti, 2022. "Reconciling TEV and VaR in Active Portfolio Management: A New Frontier," Working Papers 461, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    2. Raddatz, Claudio & Schmukler, Sergio L. & Williams, Tomás, 2017. "International asset allocations and capital flows: The benchmark effect," Journal of International Economics, Elsevier, vol. 108(C), pages 413-430.

    More about this item

    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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