Innovation, Delegation, and Asset Price Swings

Yuki Sato
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Yuki Sato: University of Lausanne and Swiss Finance Institute

No 15-03, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We propose a dynamic asset-market equilibrium model in which (1) an "innovative" asset with as-yet-unknown average payoff is traded, and (2) investors delegate investment to experts. Experts secretly renege on investors' orders and take on leveraged positions in the asset to manipulate investors' beliefs, thereby attracting more orders and fees. Despite agents' full rationality, the combination of experts' moral hazard and investors' learning generates bubble-like price dynamics: gradual upswing, overshoot, and reversal. Consistent with empirical observations, hedge funds "ride" price swings, adjusting holdings counter-cyclically to other financial intermediaries. Capping fees may lower fund leverage, dampen price swings, and improve welfare.

Keywords: asset price swings; delegated investment; innovation; learning; moral hazard; signal jamming (search for similar items in EconPapers)
JEL-codes: D80 G10 G23 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2015-02, Revised 2015-03
New Economics Papers: this item is included in nep-ino
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1503

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