A Delegated Agent Asset-pricing model

Richard W. Roll and Brad Cornell

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: Asset pricing theory has traditionally made predictions about risk and return, but has been silent on the actual process of investment. Today most investors delegate major investment decisions to financial professionals. This suggests that the instructions given by investors to their delegated agents and the compensation of those agents might be important determinants of capital market equilibrium. In the extreme when all investment decisions are delegated, the preferences and beliefs of individuals would be completely superseded by the objective functions of agent/managers. A provocative illustration of the difference between direct and delegated investing is provided based on active asset management relative to a benchmark index, a common objective function in practice. With the growing preponderance of delegated investing, future asset pricing theory will not only have to describe risk and return but, to be complete, must also be able to explain the observed objective functions used by professional managers.

Keywords: asset; pricing (search for similar items in EconPapers)
Date: 2004-06-30
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Citations: View citations in EconPapers (2)

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