JMF> Vol.3 No.4, November 2013

How Do Principal-Agent Effects in Delegated Portfolio Management Affect Asset Prices?

DownloadDownload as PDF (Size:207KB)  HTML    PP. 407-415  
Author(s)    Leave a comment

ABSTRACT

We investigate the impact of delegated portfolio management on asset prices in a noisy rational equilibrium model. Asset prices in our model are linear in fund managers’ private signals and in realized supply shocks. We show that equilibrium expected returns 1) decrease as the proportion of fund managers increase in the economy; 2) decrease as the precision of fund managers’ signals increase and 3) increase as the fund managers’ contingent fees increase.

Cite this paper

P. Kolm, "How Do Principal-Agent Effects in Delegated Portfolio Management Affect Asset Prices?," Journal of Mathematical Finance, Vol. 3 No. 4, 2013, pp. 407-415. doi: 10.4236/jmf.2013.34042.

References

[1] NYSE, “Institutional Investors,” Factbook, New York Stock Exchange, New York, 2003.
[2] F. Allen, “Do Financial Institutions Matter?” Journal of Finance, Vol. 56, No. 4, 2001, pp. 1165-1175.
http://dx.doi.org/10.1111/0022-1082.00361
[3] J. Lakonishok, A. Shleifer and R. W. Vishny, “The Structure and Performance of the Money Management Industry,” Microeconomics, Vol. 1992, 1992, pp. 339-391.
[4] Investment Company Institute, “Ownership of Mutual Funds through Professional Financial Advisers,” Research Fundamentals, Vol. 14, No. 3, 2005.
[5] N. Barberis and R. Thaler, “A Survey of Behavioral Finance,” In: G. M. Constantinides, M. Harris and R. M. Stulz, Eds., Handbook of the Economics of Finance, Elsevier Science, Oxford, 2004, pp. 1051-1121.
[6] D. S. Scharfstein and J. C. Stein, “Herd Behaviour and Investment,” American Economic Review, Vol. 80, No. 3, 1980, pp. 465-479.
[7] D. W. Diamond and R. E. Verrecchia, “Optimal Managerial Contracts and Equilibrium Security Prices,” Journal of Finance, Vol. 37, No. 2, 1982, pp. 275-287.
http://dx.doi.org/10.2307/2327326
[8] R. T. Ramakrishnan and A. V. Thakor, “Moral Hazard, Agency Costs, and Asset Prices in a Competitive Equilibrium,” Journal of Financial and Quantitative Analysis, Vol. 17, No. 4, 1982, pp. 503-532.
http://dx.doi.org/10.2307/2330905
[9] R. T. Ramakrishnan and A. V. Thakor, “The Valuation of Assets under Moral Hazard,” Journal of Finance, Vol. 39, No. 1, 1984, pp. 229-238.
http://dx.doi.org/10.1111/j.1540-6261.1984.tb03870.x
[10] N. Arora and H. Ou-Yang, “Explicit and Implicit Incentives in a Delegated Portfolio Management Problem: Theory and Evidence,” Unpublished, 2001.
[11] E. Goldman and S. L. Slezak, “Delegated Portfolio Management and Rational Prolonged Mispricing,” Journal of Finance, Vol. 58, No. 1, 2003, pp. 283-311.
http://dx.doi.org/10.1111/1540-6261.00525
[12] H. Ou-Yang, “Optimal Contracts in a Continuous-Time Delegated Portfolio Management Problem,” Review of Financial Studies, Vol. 16, No. 1, 2003, pp. 173-208.
http://dx.doi.org/10.1093/rfs/16.1.173
[13] B. Cornell and R. Roll, “A Delegated-Agent Asset-Pricing Model,” Financial Analysts Journal, Vol. 61, No. 1, 2005, pp. 57-69.
http://dx.doi.org/10.2469/faj.v61.n1.2684
[14] S. A. Ross, “Markets for Agents: Fund Management,” In: B. N. Lehmann, Ed., Legacy of Fischer Black, University Press, Oxford 2005, pp. 96-124.
[15] S. J. Grossman and J. E. Stiglitz, “On the Impossibility of Informationally Efficient Markets,” American Economic Review, Vol. 70, No. 3, 1980, pp. 393-408.
[16] M. F. Hellwig, “On the Aggregation of Information in Competitive Markets,” Journal of Economic Theory, Vol. 22, 1980, pp. 477-498.
http://dx.doi.org/10.1016/0022-0531(80)90056-3
[17] R. E. Verrecchia, “Information Acquisition in a Noisy Rational Expectations Economy,” Econometrica, Vol. 50, No. 6, 1982, pp. 1415-1430.
http://dx.doi.org/10.2307/1913389
[18] M. O’Hara, “Presidential Address: Liquidity and Price Discovery,” Journal of Finance, Vol. 58, No. 4, 2003, pp. 1335-1354. http://dx.doi.org/10.1111/1540-6261.00569
[19] D. Easley and M. O’Hara, “Information and the Cost of Capital,” Journal of Finance, Vol. 59, No. 4, 2004, pp. 1553-1583.
http://dx.doi.org/10.1111/j.1540-6261.2004.00672.x
[20] A. R. Admati, “A Noisy Rational Expectations Equilibrium for Multi-Asset Securities Markets,” Econometrica, Vol. 53, No. 3, 1985, pp. 629-658.
http://dx.doi.org/10.2307/1911659
[21] E. J. Elton, M. J. Gruber and C. R. Blake, “Incentive Fees and Mutual Funds,” Journal of Finance, Vol. 58, No. 2, 2003, pp. 779-804.
http://dx.doi.org/10.1111/1540-6261.00545
[22] J. H. Golec, “Empirical Tests of a Principal-Agent Model of the Investor-Investment Advisor Relationship,” Journal of Financial and Quantitative Analysis, Vol. 27, No. 1, 1992, pp. 81-95. http://dx.doi.org/10.2307/2331299
[23] R. Jagannathan, E. R. McGrattan and A. Scherbina, “The Declining US Equity Premium,” Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 24, No. 4, 2000, pp. 3-19.
[24] E. F. Fama and K. R. French, “The Equity Premium,” Journal of Finance, Vol. 57, No. 2, 2002, pp. 637-659.
http://dx.doi.org/10.1111/1540-6261.00437
[25] P. A. Gompers and A. Metrick, “Institutional Investors and Equity Prices,” Quarterly Journal of Economics, Vol. 116, No. 1, 2001, pp. 229-259.
http://dx.doi.org/10.1162/003355301556392
[26] R. C. Merton, “A Simple Model of Capital Market Equilibrium with Incomplete Information,” Journal of Finance, Vol. 42, No. 3, 1987, pp. 483-510.
http://dx.doi.org/10.1111/j.1540-6261.1987.tb04565.x
[27] A. R. Admati, “On Models and Measures of Information Asymmetries in Financial Markets,” PhD, Yale University, New Haven, 1982.
[28] J. Hughes and J. Liu, “Private Information, Diversification and Asset Pricing,” Unpublished, 2005.
[29] E. Ozdenoren and K. Yuan, “Feedback Effects and Asset Prices,” Journal of Finance, Vol. 63, No. 4, 2006, pp. 1939-1975.
http://dx.doi.org/10.1111/j.1540-6261.2008.01378.x

  
comments powered by Disqus

Copyright © 2014 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.