Reputational Concerns and Price Comovements
We analyze the rational expectation equilibria of a delegated portfolio management model in which two risky assets have completely independent returns and liquidity shocks. Some managers have perfect information on the assets' returns while others are uninformed and try to infer information from the prices. We show that, as long as some reasonable assumptions on the nature of the equilibrium are imposed, in a rational expectations equilibrium there is always a set of realizations of the shocks such that the returns are not revealed. In this region the prices of the two assets exhibit a strong form of comovement, as they must be identical. This occurs despite the fact that the two assets have different ex ante probabilities of repayment.
|Date of creation:||2014|
|Contact details of provider:|| Postal: Stony Brook, NY 11794-4384|
Web page: http://www.stonybrook.edu/commcms/economics/
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- Dimitri Vayanos & Paul Woolley, 2013.
"An Institutional Theory of Momentum and Reversal,"
Review of Financial Studies,
Society for Financial Studies, vol. 26(5), pages 1087-1145.
- Dimitri Vayanos & Paul Woolley, 2008. "An Institutional Theory of Momentum and Reversal," NBER Working Papers 14523, National Bureau of Economic Research, Inc.
- Dimitri Vayanos & Paul Woolley, 2011. "An institutional Theory of Momentum and Reversal," FMG Discussion Papers dp666, Financial Markets Group.
- Vayanos, Dimitri & Woolley, Paul, 2008. "An institutional theory of momentum and reversal," LSE Research Online Documents on Economics 24423, London School of Economics and Political Science, LSE Library.
- Dimitri Vayanos & Paul Woolley, 2008. "An Institutional Theory of Momentum and Reversal," FMG Discussion Papers dp621, Financial Markets Group.
- Vayanos, Dimitri & Woolley, Paul, 2008. "An Institutional Theory of Momentum and Reversal," CEPR Discussion Papers 7068, C.E.P.R. Discussion Papers.
- Coval, Joshua & Stafford, Erik, 2007. "Asset fire sales (and purchases) in equity markets," Journal of Financial Economics, Elsevier, vol. 86(2), pages 479-512, November.
- Joshua D. Coval & Erik Stafford, 2005. "Asset Fire Sales (and Purchases) in Equity Markets," NBER Working Papers 11357, National Bureau of Economic Research, Inc.
- Laura E. Kodres & Matthew Pritsker, 2002. "A Rational Expectations Model of Financial Contagion," Journal of Finance, American Finance Association, vol. 57(2), pages 769-799, April.
- Vayanos, Dimitri, 2004. "Flight to quality, flight to liquidity, and the pricing of risk," LSE Research Online Documents on Economics 456, London School of Economics and Political Science, LSE Library.
- Dimitri Vayanos, 2004. "Flight to Quality, Flight to Liquidity, and the Pricing of Risk," NBER Working Papers 10327, National Bureau of Economic Research, Inc.
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