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Decentralized Portfolio Management

Author

Listed:
  • Paulo Coutinho
  • Benjamin Miranda Tabak

Abstract

Within a mean-variance model we analyze the problem of decentralized portfolio management. We find the solution for the optimal portfolio allocation for a head trader operating in n different markets, which is called the optimal centralized portfolio. However, as there are many traders specialized in different markets, the solution to the problem of optimal decentralized allocation should be different from the centralized case. In this paper we derive conditions for the solutions to be equivalent. We use multivariate normal returns and a negative exponential function to solve the problem analytically. We generate the equivalence of solutions by assuming that different traders face different interest rates for borrowing and lending. This interest rate is dependent on the ratio of the degrees of risk aversion of the trader and the head trader, on the excess return, and on the correlation between asset returns.

Suggested Citation

  • Paulo Coutinho & Benjamin Miranda Tabak, 2001. "Decentralized Portfolio Management," Working Papers Series 22, Central Bank of Brazil, Research Department.
  • Handle: RePEc:bcb:wpaper:22
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    File URL: http://www.bcb.gov.br/pec/wps/ingl/wps22.pdf
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    References listed on IDEAS

    as
    1. Paulo Coutinho & Benjamin Miranda Tabak, 2003. "Decentralized Portfolio Management," Brazilian Review of Finance, Brazilian Society of Finance, pages 243-270.
    2. Pedro H. Albuquerque, 2001. "Os Impactos Econômicos da CPMF: Teoria e Evidência," Working Papers Series 21, Central Bank of Brazil, Research Department.
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    Citations

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    Cited by:

    1. Minella, Andre & de Freitas, Paulo Springer & Goldfajn, Ilan & Muinhos, Marcelo Kfoury, 2003. "Inflation targeting in Brazil: constructing credibility under exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1015-1040, December.
    2. Charles Lima De Almeida & Marco AuréLIO Peres & Geraldo Da Silva E Souza & Benjamin Miranda Tabak, 2003. "Optimal monetary rules: the case of Brazil," Applied Economics Letters, Taylor & Francis Journals, vol. 10(5), pages 299-302, April.
    3. Benjamin Miranda Tabak & Solange Maria Guerra, 2002. "Stock Returns and Volatility," Working Papers Series 54, Central Bank of Brazil, Research Department.
    4. Tarsila Segalla Afanasieff & Priscilla Maria Villa Lhacer & Márcio I. Nakane, 2002. "The Determinants of Bank Interest Spread in Brazil," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 183-207, July-Dece.
    5. André Soares Loureiro & Fernando de Holanda Barbosa, 2004. "Risk Premia for Emerging Markets Bonds: Evidence from Brazilian Government Debt, 1996-2002," Working Papers Series 85, Central Bank of Brazil, Research Department.
    6. Victorio Yi Tson Chu, 2002. "Credit Channel with Sovereign Credit Risk: an Empirical Test," Working Papers Series 51, Central Bank of Brazil, Research Department.
    7. Benjamin Miranda Tabak, 2003. "Monetary Policy Surprises and the Brazilian Term Structure of Interest Rates," Working Papers Series 70, Central Bank of Brazil, Research Department.
    8. Araújo, Aloísio Pessoa de & Leon, Márcia Saraiva, 2003. "Speculative attacks on debts and optimum currency area: a welfare analysis," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 514, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    9. Arminio Fraga & Ilan Goldfajn & André Minella, 2004. "Inflation Targeting in Emerging Market Economies," NBER Chapters,in: NBER Macroeconomics Annual 2003, Volume 18, pages 365-416 National Bureau of Economic Research, Inc.
    10. Eui Jung Chang & Marcelo Kfoury Muinhos & Joanílio Rodolpho Teixeira, 2002. "Macroeconomic Coordination and Inflation Targeting in a Two-Country Model," Working Papers Series 50, Central Bank of Brazil, Research Department.
    11. Leonardo Soriano de Alencar & Márcio I. Nakane, 2003. "Real Balances in the Utility Function: Evidence for Brazil," Working Papers Series 68, Central Bank of Brazil, Research Department.
    12. Paulo Coutinho & Benjamin Miranda Tabak, 2002. "Delegated Portfolio Management," Working Papers Series 60, Central Bank of Brazil, Research Department.
    13. Benjamin Miranda Tabak, 2003. "On the Information Content of Oil Future Prices," Working Papers Series 65, Central Bank of Brazil, Research Department.
    14. Marcelo Kfoury Muinhos & Márcio I. Nakane, 2006. "Comparing equilibrium real interest rates: different approaches to measure Brazilian rates," Working Papers Series 101, Central Bank of Brazil, Research Department.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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