Reputational Concerns and Price Comovements

Maryam Sami and Sandro Brusco

No 384, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: We analyze the rational expectation equilibria of a delegated port- folio management model in which two risky assets have completely independent returns and liquidity shocks. Some managers have per- fect information on the assets' returns while others are uninformed and try to infer information from the prices. We show that, as long as some reasonable assumptions on the nature of the equilibrium are imposed, in a rational expectations equilibrium there is always a set of realizations of the shocks such that the returns are not revealed. In this region the prices of the two assets exhibit a strong form of comove- ment, as they must be identical. This occurs despite the fact that the two assets have different ex ante probabilities of repayment.

Keywords: Delegated Portfolio; Comovement. (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2014
New Economics Papers: this item is included in nep-mic
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Working Paper: Reputational Concerns and Price Comovements (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:384

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