Managerial Incentives and Financial Contagion

Sujit Chakravorti and Subir Lall ()

International Finance from University Library of Munich, Germany

Abstract: This paper proposes a framework for comovements of asset prices with seemingly unrelated fundamentals, as an outcome of optimal portfolio strategies by fund managers. In emerging markets, dedicated managers outperforming a benchmark index and global managers maximizing absolute returns lead to systematic interactions between asset prices, without asymmetric information. The model determines optimal portfolio weights, the incidence of relative value strategies, and prices systematically deviating from fundamentals with limits to arbitraging this differential. Managerial compensation contracts, optimal at the firm level, may lead to inefficiencies at the macroeconomic level. We identify conditions when shocks in one emerging market affect others.

Keywords: Financial Crises; Index Investors; Global Linkages (search for similar items in EconPapers)
JEL-codes: F36 G11 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2004-08-16
New Economics Papers: this item is included in nep-cfn and nep-fin
Note: Type of Document - pdf; pages: 47
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Managerial incentives and financial contagion (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpif:0408003

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