Delegated Portfolio Management, Benchmarking, and the Effects on Financial Markets
Electronic Access:
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Summary:
We analyze the implications of linking the compensation of fund managers to the return of their portfolio relative to that of a benchmark—a common solution to the agency problem in delegated portfolio management. In the presence of such relativeperformance- based objectives, investors have reduced expected utility but markets are typically more informative and deeper. Furthermore, in a multiple asset/market framework we show that (i) relative performance concerns lead to an increase in the correlation between markets (financial contagion); (ii) benchmark inclusion increases price volatility; (iii) home bias emerges as a rational outcome. When information is costly, information acquisition is hindered and this attenuates the effects on informativeness and depth of the market.
Series:
Working Paper No. 2015/198
Subject:
English
Publication Date:
September 8, 2015
ISBN/ISSN:
9781513586878/1018-5941
Stock No:
WPIEA2015198
Pages:
39
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