Asset Pricing with Relative Performance and Heterogeneous Agents

Ting Levy, Xiangbo Liu, Zijun Liu, Zhigang Qiu

Department of Economics, College of Business, Florida Atlantic University, Boca Raton, USA.
Hanqing Advanced Institute and School of Economics, Renmin University of China, Beijing, China.
Hanqing Advanced Institute and School of Finance, Renmin University of China, Beijing, China.
London School of Economics, London, UK.

DOI: 10.4236/tel.[phone]                

Abstract

This paper studies the impact of relative performance on portfolio choices and asset prices when fund managers differ in size and exogenous financial shocks. We find that with these heterogeneities, fund managers change their trading behaviors significantly.

Keywords

Portfolio Choice; Asset Pricing; Relative Performance

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	J. Chevalier and G. Ellison, “Risk Taking by Mutual Funds as a Response to Incentives,” Journal of Political Economy, Vol. 105, No. 6, 1997, pp. 1167-1200. doi:10.1086/516389
[2]	E. Sirri and P. Tufano, “Costly Search and Mutual Fund Flows,” Journal of Finance, Vol. 53, No. 5, 1998, pp. 359-379. doi:10.1111/0022-1082.00066
[3]	J. Huang, K. D. Wei and H. Yan, “Participation Costs and the Sensitivity of Fund Flows to Past Performance,” Journal of Finance, Vol. 62, No. 3, 2007, pp. 1273-1311. doi:10.1111/j.1540-6261.2007.01236.x
[4]	S. Basak and D. Makarov, “Strategic Asset Allocation in Money Management,” Journal of Finance, 2012.
[5]	S. Kapur and A. Timmermann, “Relative Performance Evaluation Contracts and Asset Market Equilibrium,” The Economic Journal, Vol. 115, No. 506, 2005, pp. 1077-1102. doi:10.1111/j.1468-0297.2005.01033.x
[6]	S. Basak and A. Pavlova, “Asset Prices and Institutional Investors,” American Economic Review, Forthcoming.
[7]	D. Cuoco and R. Kaniel, “Equilibrium Prices in the Presence of Delegated Portfolio Management,” Journal of Financial Economics, Vol. 101, No. 2, 2011, pp. 264-269. doi:10.1016/j.jfineco.2011.02.012
[8]	Q. Chen, I. Glodstein and W. Jiang, “Payoff Complementarities and Financial Fragility: Evidence from Mutual Fund Outflows,” Journal of Financial Economics, Vol. 97, No. 2, 2010, pp. 239-262. doi:10.1016/j.jfineco.2010.03.016