Relative Performance Evaluation Contracts and Asset Market Equilibrium

Sandeep Kapur and Allan Timmermann

Finance from University Library of Munich, Germany

Abstract: We analyse the equilibrium consequences of performance-based contracts for fund managers. Managerial remuneration is tied to a fund's absolute performance and its performance relative to rival funds. Investors choose whether or not to delegate their investment to better-informed fund managers; if they delegate they choose the parameters of the optimal contract subject to the fund manager's participation constraint. We find that the impact of relative performance evaluation on equilibrium equity premium and on portfolio herding critically depends on whether the participation constraint is binding. Simple numerical examples suggest that the increased importance of delegation and performance evaluation may lower the equity premium.

Keywords: portfolio delegation; relative performance evaluation; equity premium (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Pages: 31 pages
Date: 2004-08-11
New Economics Papers: this item is included in nep-cfn and nep-fin
Note: Type of Document - pdf; pages: 31
References: Add references at CitEc
Citations:

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0408/0408005.pdf (application/pdf)

Related works:
Journal Article: Relative Performance Evaluation Contracts and Asset Market Equilibrium (2005)
Working Paper: Relative Performance Evaluation Contracts and Asset Market Equilibrium (2005)
Working Paper: Relative Performance Evaluation Contracts and Asset Market Equilibrium (2004)
Working Paper: Relative Performance Evaluation Contracts and Asset Market Equilibrium (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0408005

Access Statistics for this paper

More papers in Finance from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).