Delegated Portfolio Management and Risk Taking Behavior

José Fernandes, Juan Peña and Benjamin Tabak

No 199, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: Standard models of moral hazard predict a negative relationship between risk and incentives; however empirical studies on mutual funds present mixed results. In this paper, we propose a behavioral principal-agent model in the context of professional managers, focusing on active and passive investment strategies. Using this general framework, we evaluate how incentives affect the risk taking behavior of managers, using the standard moral hazard model as a special case; and solve the previous contradiction. Empirical evidence, based on a comprehensive world sample of 4584 mutual funds, gives support to our theoretical model.

Date: 2009-12
New Economics Papers: this item is included in nep-cbe and nep-cta
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Journal Article: Delegated portfolio management and risk-taking behavior (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:bcb:wpaper:199

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