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

Deniz Igan and Marcelo Pinheiro ()
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Marcelo Pinheiro: Public Company Accounting Oversight Board, Postal: 1666 K Street NW, Washington, DC 20006, http://pcaobus.org/About/Pages/Marcelo-Pinheiro.aspx

Journal of Financial Transformation, 2016, vol. 43, 144-157

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 relative-performance-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 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: Delegated portfolio management; Informativeness; Liquidity; Contagion; Home bias (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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Working Paper: Delegated Portfolio Management, Benchmarking, and the Effects on Financial Markets (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1564

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