Asset management contracts and equilibrium prices

Andrea M. Buffa, Dimitri Vayanos and Paul Woolley

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We model asset management as a continuum between active and passive: managers can deviate from benchmark indices to exploit noise-trader induced distortions, but agency frictions constrain these deviations. Because constraints force managers to buy assets that they underweight when these assets appreciate, overvalued assets have high volatility, and the risk-return relationship becomes inverted. Distortions are more severe for overvalued assets than for undervalued ones because trading against the former entails more risk and tighter constraints. We provide empirical evidence supporting our model’s main mechanisms. Using the data, we infer the constraints’ tightness and compute a measure of effective arbitrage capital.

JEL-codes: F3 G3 J01 R14 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2022-12-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published in Journal of Political Economy, 1, December, 2022, 130(12), pp. 3146 - 3201. ISSN: 0022-3808

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http://eprints.lse.ac.uk/113889/ Open access version. (application/pdf)

Related works:
Journal Article: Asset Management Contracts and Equilibrium Prices (2022)
Working Paper: Asset Management Contracts and Equilibrium Prices (2014)
Working Paper: Asset management contracts and equilibrium prices (2014)
Working Paper: Asset Management Contracts and Equilibrium Prices (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:113889

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