Delegated Portfolio Management, Benchmarking, and the Effects on Financial Markets

Deniz Igan and Marcelo Pinheiro

No 2015/198, IMF Working Papers from International Monetary Fund

Abstract: We analyze the implications of linking the compensation of fund managers to the return of their portfolio relative to that of a benchmark—a common solution to the agency problem in delegated portfolio management. In the presence of such relativeperformance- based objectives, investors have reduced expected utility but markets are typically more informative and deeper. Furthermore, in a multiple asset/market framework we show that (i) relative performance concerns lead to an increase in the correlation between markets (financial contagion); (ii) benchmark inclusion increases price volatility; (iii) home bias emerges as a rational outcome. When information is costly, information acquisition is hindered and this attenuates the effects on informativeness and depth of the market.

Keywords: WP (search for similar items in EconPapers)
Pages: 39
Date: 2015-09-08
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Citations: View citations in EconPapers (2)

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Journal Article: Delegated Portfolio Management, Benchmarking, and the Effects on Financial Markets (2016)
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