Asset Management Contracts and Equilibrium Prices

Dimitri Vayanos, Paul Woolley and ,
Authors registered in the RePEc Author Service: Andrea M. Buffa

No 10152, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the joint determination of fund managers' contracts and equilibrium asset prices. Because of agency frictions, investors make managers' fees more sensitive to performance and benchmark performance against a market index. This makes managers unwilling to deviate from the index and exacerbates price distortions. Because trading against overvaluation exposes managers to greater risk of deviating from the index than trading against undervaluation, agency frictions bias the aggregate market upwards. They can also generate a negative relationship between risk and return because they raise the volatility of overvalued assets. Socially optimal contracts provide steeper performance incentives and cause larger pricing distortions than privately optimal contracts.

Keywords: Asset pricing; Delegated portfolio management; Market anomalies; Optimal contracts (search for similar items in EconPapers)
JEL-codes: D86 G12 G14 G18 G23 (search for similar items in EconPapers)
Date: 2014-09
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Citations: View citations in EconPapers (34)

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Related works:
Journal Article: Asset Management Contracts and Equilibrium Prices (2022)
Working Paper: Asset management contracts and equilibrium prices (2022)
Working Paper: Asset management contracts and equilibrium prices (2014)
Working Paper: Asset Management Contracts and Equilibrium Prices (2014)
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