Mutual Fund Tournament: Risk Taking Incentives Induced By Ranking Objectives

Alexei Goriaev, Frederic Palomino and Andrea Prat

No 2794, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: There is now extensive empirical evidence showing that fund managers have relative performance objectives and adapt their investment strategy in the last part of the calendar year to balance their performance in the early part of the year. However, emphasis was put on returns in excess of some exogenous benchmark return. In this Paper, we investigate whether fund managers have ranking objectives (as in a tournament). First, in a two-period model, we analyse the game played by two risk-neutral fund managers with ranking objectives. We show that ranking objectives provide incentives for an interim loser to increase risk in the last part of the year. In the second part of the Paper, we test some predictions of the model. We find evidence that funds ranked in the top decile after the first part of the year have risk incentives generated by ranking objectives and that risk induced by ranking objectives is mainly systematic.

Keywords: Interim Performance; Ranking-Based Objectives; Risk-Taking Incentives (search for similar items in EconPapers)
JEL-codes: G11 G24 (search for similar items in EconPapers)
Date: 2001-05

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP2794.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Mutual fund tournament: risk taking incentives induced by ranking objectives (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cpr:ceprdp:2794

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP2794.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().