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Strategic Asset Allocation in Money Management

  • Basak, Suleyman
  • Makarov, Dmitry

Money managers behave strategically when competing for fund flows within relatively small groups. We study strategic interaction between two risk-averse managers in continuous time, characterizing analytically their unique equilibrium dynamic investments. Driven by chasing and contrarian mechanisms when one is well ahead, they gamble in the opposite direction when their performances are close. We also discuss multiple and mixed-strategy equilibria. Equilibrium policy of each crucially depends on the opponent’s risk attitude. Hence, client investors, concerned about how a strategic manager may trade on their behalf, should also learn competitors’ characteristics--as against non-strategic settings, where knowing a manager’s own characteristics suffices to determine behavior.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8457.

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Date of creation: Jun 2011
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Handle: RePEc:cpr:ceprdp:8457
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  1. Diane Del Guercio & Paula A. Tkac, 2001. "Star power: the effect of Morningstar ratings on mutual fund flows," FRB Atlanta Working Paper No. 2001-15, Federal Reserve Bank of Atlanta.
  2. Jér�me B. Detemple & René Garcia & Marcel Rindisbacher, 2003. "A Monte Carlo Method for Optimal Portfolios," Journal of Finance, American Finance Association, vol. 58(1), pages 401-446, 02.
  3. Alexander Kempf & Stefan Ruenzi, 2008. "Tournaments in Mutual-Fund Families," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 1013-1036, April.
  4. Gyöngyi Lóránth & Emanuela Sciubba, 2006. "Relative Performance, Risk and Entry in the Mutual Fund Industry," Birkbeck Working Papers in Economics and Finance 0612, Birkbeck, Department of Economics, Mathematics & Statistics.
  5. Jaksa Cvitanic & Levon Goukasian & Fernando Zapatero, 2000. "Monte Carlo Valuation of Optimal Portfolios in Complete Markets," Econometric Society World Congress 2000 Contributed Papers 1246, Econometric Society.
  6. Jennifer Carpenter, 1999. "Does Option Compensation Increase Managerial Risk Appetite?," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-076, New York University, Leonard N. Stern School of Business-.
  7. Goriaev, A.P. & Palomino, F.A. & Prat, A., 2000. "Mutual Fund Tournament : Risk Taking Incentives Induced by Ranking Objectives," Discussion Paper 2000-94, Tilburg University, Center for Economic Research.
  8. JULES H. van BINSBERGEN & MICHAEL W. BRANDT & RALPH S. J. KOIJEN, 2008. "Optimal Decentralized Investment Management," Journal of Finance, American Finance Association, vol. 63(4), pages 1849-1895, 08.
  9. 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.
  10. Palomino, Frederic, 2005. "Relative performance objectives in financial markets," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 351-375, July.
  11. Anand M. Goel & Anjan V. Thakor, 2005. "Green with Envy: Implications for Corporate Investment Distortions," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2255-2288, November.
  12. Baye, Michael R & Tian, Guoqiang & Zhou, Jianxin, 1993. "Characterizations of the Existence of Equilibria in Games with Discontinuous and Non-quasiconcave Payoffs," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 935-48, October.
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