Asset management contracts and equilibrium prices

Andrea Buffa, Dimitri Vayanos and Paul Woolley

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

Abstract: We study the joint determination of fund managers' contracts and equilibrium asset prices. Because of agency frictions, investors make managers' fees more sensitive to performance and benchmark performance against a market index. This makes managers unwilling to deviate from the index and exacerbates price distortions. Because trading against overvaluation exposes managers to greater risk of deviating from the index than trading against undervaluation, agency frictions bias the aggregate market upwards. They can also generate a negative relationship between risk and return because they raise the volatility of overvalued assets. Socially optimal contracts provide steeper performance incentives and cause larger pricing distortions than privately optimal contracts.

JEL-codes: D86 G12 G14 G18 G23 (search for similar items in EconPapers)
Date: 2014-10-01
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http://eprints.lse.ac.uk/119026/ Open access version. (application/pdf)

Related works:
Journal Article: Asset Management Contracts and Equilibrium Prices (2022)
Working Paper: 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)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119026

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