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On the Size of the Active Management Industry

Author

Listed:
  • Lubos Pastor

    (University of Chicago Booth School of Business)

  • Robert F. Stambaugh

    () (The Wharton School of the University of Pennsyvlania)

Abstract

We analyze the equilibrium size of the active management industry and the role of historical data---how investors use it to decide how much to invest in the industry, and how researchers use it to judge whether the industry's size is reasonable. As the industry's size increases, every manager's ability to outperform passive benchmarks declines, to an unknown degree. We find that researchers need not be puzzled by the industry's substantial size despite the industry's negative track record. We also find investors face endogeneity that limits their learning about returns to scale and allows prolonged departures of the industry's size from its optimal level.

Suggested Citation

  • Lubos Pastor & Robert F. Stambaugh, 2010. "On the Size of the Active Management Industry," Working Papers 2010-001, Becker Friedman Institute for Research In Economics.
  • Handle: RePEc:bfi:wpaper:2010-001
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    active management; returns to scale; learning;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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