Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management
The investment of the ECB reserves in US dollars and yen involves an annual performance assessment of portfolio managers, located in the Eurosystemï¿½s national central banks. Employing new data on individual portfolios during 2002-2009, we study this peculiar tournament and show the existence of risk-shifting behaviour by reserve managers related to their year-to-date ranking: interim losers increase relative risk in the second half of the year, in the same way as mutual fund managers. In the dollar case the adjustment to ranking is reduced or offset if reserve managers have achieved a positive interim performance against the benchmark. Yen reserve managers that rank low show a tendency to increase effort, as proxied by portfolio turnover. Those who ranked low in the previous year tend to reduce risk significantly. Since reserve managers should have a comparative advantage over the benchmark within a monthly horizon, possible enhancements to the design of the tournament might involve an increased reward for effort and performance by means of a convex scoring system linked to monthly, rather than annual, performance.
|Date of creation:||Jan 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Via Nazionale, 91 - 00184 Roma|
Web page: http://www.bancaditalia.it
More information through EDIRC
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.:
- Alexander Kempf & Stefan Ruenzi, 2004.
"Tournaments in Mutual Fund Families,"
- Basak, Suleyman & Pavlova, Anna & Shapiro, Alex, 2006.
"Optimal Asset Allocation and Risk Shifting in Money Management,"
CEPR Discussion Papers
5524, C.E.P.R. Discussion Papers.
- Suleyman Basak & Anna Pavlova & Alexander Shapiro, 2007. "Optimal Asset Allocation and Risk Shifting in Money Management," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1583-1621, 2007 21.
- Ronald G. Ehrenberg & Michael L. Bognanno, 1988.
"Do Tournaments Have Incentive Effects?,"
NBER Working Papers
2638, National Bureau of Economic Research, Inc.
- Stracca, Livio, 2005.
"Delegated portfolio management: a survey of the theoretical literature,"
Working Paper Series
0520, European Central Bank.
- Livio Stracca, 2006. "Delegated Portfolio Management: A Survey Of The Theoretical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 823-848, December.
- Kempf, Alexander & Ruenzi, Stefan & Thiele, Tanja, 2008.
"Employment risk, compensation incentives and managerial risk taking: Evidence from the mutual fund industry,"
CFR Working Papers
07-02, University of Cologne, Centre for Financial Research (CFR).
- Kempf, Alexander & Ruenzi, Stefan & Thiele, Tanja, 2009. "Employment risk, compensation incentives, and managerial risk taking: Evidence from the mutual fund industry," Journal of Financial Economics, Elsevier, vol. 92(1), pages 92-108, April.
- Florian Ederer, 2010. "Feedback and Motivation in Dynamic Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 733-769, 09.
- Goriaev, A.P. & Palomino, F.A. & Prat, A., 2000.
"Mutual Fund Tournament : Risk Taking Incentives Induced by Ranking Objectives,"
2000-94, Tilburg University, Center for Economic Research.
- Goriaev, Alexei P. & Palomino, Frédéric & Prat, Andrea, 2001. "Mutual Fund Tournament: Risk Taking Incentives Induced By Ranking Objectives," CEPR Discussion Papers 2794, C.E.P.R. Discussion Papers.
- Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2011.
"Risk Shifting and Mutual Fund Performance,"
Review of Financial Studies,
Society for Financial Studies, vol. 24(8), pages 2575-2616.
- Suleyman Basak & Dmitry Makarov, 2010.
"Difference in Interim Performance and Risk Taking with Short-sale Constraints,"
w0159, Center for Economic and Financial Research (CEFIR).
- Basak, Suleyman & Makarov, Dmitry, 2012. "Difference in interim performance and risk taking with short-sale constraints," Journal of Financial Economics, Elsevier, vol. 103(2), pages 377-392.
- Basak, Suleyman & Makarov, Dmitry, 2010. "Difference in Interim Performance and Risk Taking with Short-Sale Constraints," CEPR Discussion Papers 8072, C.E.P.R. Discussion Papers.
- Goriaev, A.P. & Nijman, T.E. & Werker, B.J.M., 2005.
"Yet another look at mutual fund tournaments,"
Other publications TiSEM
18f339f2-5cf9-4e35-9440-9, Tilburg University, School of Economics and Management.
- Jennifer Lynch Koski & Jeffrey Pontiff, 1999.
"How Are Derivatives Used? Evidence from the Mutual Fund Industry,"
Journal of Finance,
American Finance Association, vol. 54(2), pages 791-816, 04.
- Jennifer Koski & Jeffrey Pontiff, 1996. "How Are Derivatives Used? Evidence from the Mutual Fund Industry," Center for Financial Institutions Working Papers 96-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_840_12. 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 references are entirely missing, you can add them using this form.