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Fund managers, career concerns, and asset price volatility

Listed author(s):
  • Veronica Guerrieri
  • Peter Kondor

We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on the default probability. Looking at the past performance, investors update beliefs on their managers and make firing decisions. This leads to career concerns which affect investment decisions, generating a positive or negative “reputational premium.” For example, when the default probability is high, the return on the risky bond has to be high to compensate the uninformed managers for the high risk of being fired. As the default probability changes over time, the reputational premium amplifies price volatility.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 446.

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Date of creation: 2010
Handle: RePEc:fip:fedmsr:446
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