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The impact of benchmarking and portfolio constraints on a fund manager´s market timing ability

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  • JUAN PEDRO GOMEZ

    () (Instituto de Empresa)

Abstract

We study the effects that relative (to a benchmark) performance evaluation has on the provision of incentives for the search of private information when managers are exogenously constrained in their ability to sell short and purchase on margin. With these portfolio constraints we show that benchmarking the manager´s incentive fee affect her timing ability and hence there exist an optimal benchmark, even without moral hazard between the investor and manager. In the presence of moral hazard, numerical results show that the optimal incentive fee is higher than the Pareto-efficient fee and the optimal benchmark is risky but less so than the no moral hazard benchmark.

Suggested Citation

  • Juan Pedro Gomez, 2007. "The impact of benchmarking and portfolio constraints on a fund manager´s market timing ability," Working Papers Economia wp07-02, Instituto de Empresa, Area of Economic Environment.
  • Handle: RePEc:emp:wpaper:wp07-02
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    File URL: http://latienda.ie.edu/working_papers_economia/WP07-02.pdf
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    References listed on IDEAS

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    1. David E. Guest & Jonathan Michie & Neil Conway & Maura Sheehan, 2003. "Human Resource Management and Corporate Performance in the UK," British Journal of Industrial Relations, London School of Economics, vol. 41(2), pages 291-314, June.
    2. Ichniowski, Casey & Shaw, Kathryn & Prennushi, Giovanna, 1997. "The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines," American Economic Review, American Economic Association, vol. 87(3), pages 291-313, June.
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    Keywords

    Benchmarking; Incentive fee; Market timing; Portfolio constraints;

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