Asset management as creator of market inefficiency

Dimitri Vayanos and Paul Woolley

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In this paper, we describe how agency frictions in asset management can generate prime violations of the Efficient Markets Hypothesis, such as momentum, value and an inverted risk-return relationship. Momentum in our theory is associated with procyclical fund flows and price over-reaction, and is more pronounced for overvalued assets. The investors who generate the momentum and who are losing from it are those requiring their asset managers to keep their portfolios close to benchmark indices. Our theory suggests a rethinking of asset management contracts. Contracts should employ measures of long-run risk and return, and benchmark indices that emphasize asset fundamentals. There should also be greater transparency on managers’ choice of strategies.

Keywords: financial markets; asset management; agency frictions; momentum; benchmarking (search for similar items in EconPapers)
JEL-codes: E44 G12 G14 G23 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2023-04-19
New Economics Papers: this item is included in nep-fmk
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Published in Atlantic Economic Journal, 19, April, 2023, 51(1), pp. 1-11. ISSN: 0197-4254

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http://eprints.lse.ac.uk/118540/ Open access version. (application/pdf)

Related works:
Journal Article: Asset Management as Creator of Market Inefficiency (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118540

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