Asset pricing implications of benchmarking: a two-factor CAPM
The paper considers the equilibrium effects of an institutional investor whose performance is benchmarked to an index. In a partial equilibrium setting, the objective of the institutional investor is modelled as the maximization of expected utility (an increasing and concave function, in order to accommodate risk aversion) of final wealth minus a benchmark. In equilibrium this optimal strategy gives rise to the two-beta CAPM: together with the market beta a new risk-factor (termed active management risk) is brought into the analysis. This new beta is defined as the normalized (to the benchmark's variance) covariance between the asset excess return and the excess return of the market over the benchmark index. The empirical test supports the model's predictions. The cross-section return on the active management risk is positive and significant, especially after 1990, when institutional investors became the representative agent of the market.
Volume (Year): 9 (2003)
Issue (Month): 4 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/REJF20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/REJF20|
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.:
- Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
- Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-52, September.
- Suleyman Basak & Alex Shapiro & Lucie Teplá, 2006.
"Risk Management with Benchmarking,"
INFORMS, vol. 52(4), pages 542-557, April.
- Diane Del Guercio & Paula A. Tkac, 2000. "The determinants of the flow of funds of managed portfolios: mutual funds versus pension funds," Working Paper 2000-21, Federal Reserve Bank of Atlanta.
- Errunza, Vihang & Losq, Etienne, 1985. " International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-24, March.
- C. J. Adcock & E. A. Clark, 1999. "Beta lives - some statistical perspectives on the capital asset pricing model," The European Journal of Finance, Taylor & Francis Journals, vol. 5(3), pages 213-224.
When requesting a correction, please mention this item's handle: RePEc:taf:eurjfi:v:9:y:2003:i:4:p:343-357. 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: (Michael McNulty)
If references are entirely missing, you can add them using this form.