Competition in Portfolio Management: Theory and Experiment

Elena Asparouhova (), Peter Bossaerts (), Jernej Copic, Brad Cornell (), Jaksa Cvitanic () and Debrah Meloso ()
Additional contact information
Elena Asparouhova: David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112
Peter Bossaerts: David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112
Brad Cornell: Humanities and Social Sciences, California Institute of Technology, Pasadena, California 91125
Debrah Meloso: Department of Decision Sciences, Bocconi University, 20136 Milan, Italy

Management Science, 2015, vol. 61, issue 8, 1868-1888

Abstract: We explore theoretically and experimentally the general equilibrium price and allocation implications of delegated portfolio management when the investor--manager relationship is nonexclusive. Our theory predicts that competition forces managers to promise portfolios that mimic Arrow--Debreu (AD) securities, which investors then combine to fit their preferences. A weak version of the capital asset pricing model (CAPM) obtains, where state prices (relative to state probabilities) implicit in prices of traded securities will be inversely ranked to aggregate wealth across states. Our experiment broadly corroborates the price and choice predictions of the theory. However, price quality deteriorates when only a few managers attract most of the available wealth. Wealth concentration increases because funds flow toward managers who offer portfolios closer to replicating AD securities (as in the theory), but also because funds flow to managers who had better performance in the immediate past (an observation unrelated to the theory). This paper was accepted by Jerome Detemple, finance.

Keywords: delegated portfolio management; asset pricing theory; experimental finance (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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http://dx.doi.org/10.1287/mnsc.2014.1935 (application/pdf)

Related works:
Working Paper: Competition in Portfolio Management: Theory and Experiment (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:61:y:2015:i:8:p:1868-1888

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