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Fund Managers, Career Concerns, and Asset Price Volatility

Author

Listed:
  • Veronica Guerrieri
  • Peter Kondor

Abstract

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 default risk. Based on past performance, investors update beliefs on managers and make firing decisions. This leads to career concerns that affect managers' investment decisions, generating a countercyclical "reputational premium." When default risk is high, return on bonds is high to compensate uninformed managers for the high risk of being fired. As default risk changes over time, the reputational premium amplifies price volatility. (JEL G11, G12, G23, L84)

Suggested Citation

  • Veronica Guerrieri & Peter Kondor, 2012. "Fund Managers, Career Concerns, and Asset Price Volatility," American Economic Review, American Economic Association, vol. 102(5), pages 1986-2017, August.
    • Handle: RePEc:aea:aecrev:v:102:y:2012:i:5:p:1986-2017
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    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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