Competition in Portfolio Management: Theory and Experiment

Elena Asparouhova, Peter Bossaerts, Jernej Copic, Brad Cornell, Jaksa Cvitanic () and Debrah Meloso

No 438, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: We develop a new theory of delegated investment whereby managers compete in terms of composition of the portfolios they promise to acquire. We study the resulting asset pricing in the inter-manager market. We incentivize investors so that we obtain sharp predictions. Managers are paid a fixed fraction of fund size. In equilibrium, investors choose managers who offer portfolios that mimic Arrow-Debreu (state) securities. Prices in the inter-manager market are predicted to satisfy a weak version of the CAPM: state-price probability ratios implicit in prices of traded assets decrease in aggregate wealth across states. An experiment involving about one hundred participants over six weeks broadly supports the theoretical predictions. Pricing quality declines, however, when fund concentration increases because funds flow towards managers who offer portfolios closer to Arrow-Debreu securities (as in the theory) and who had better recent performance (an observation unrelated to the theory).

Date: 2012
New Economics Papers: this item is included in nep-cbe and nep-exp
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Journal Article: Competition in Portfolio Management: Theory and Experiment (2015)
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