Equilibrium prices in the presence of delegated portfolio management

Cuoco, Domenico; Kaniel, Ron

doi:10.1016/j.jfineco.2011.02.012

Cited by 268 publications

(155 citation statements)

References 47 publications

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“…6 The fixed payment is EUR 8 and the bonus payment (slope of the payoff function in Figure 1) is set to EUR 2.1875 for every 100 Taler in wealth exceeding 3000 Taler. If a subject holds the 6 Typically, the compensation structures in the investment industry include two main components (Cuoco and Kaniel, 2011). One component is linearly or non-linearly related to the performance of the portfolio.…”

Section: Experimental Treatmentsmentioning

confidence: 99%

Do option-like incentives induce overvaluation? Evidence from experimental asset markets

Holmén¹,

Kirchler²,

Kleinlercher³

2014

Journal of Economic Dynamics and Control

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One potential reason for bubbles evolving prior to the financial crisis was excessive risk taking stemming from option-like incentive schemes in financial institutions. By running laboratory asset markets, we investigate the impact of option-like incentives on price formation and trading behavior. We observe (i) that option-like incentives induce significantly higher market prices than linear incentives. We further find that (ii) option-like incentives provoke subjects to behave differently and to take more risk than subjects with linear incentives. We finally show that (iii) trading at inflated prices is rational for subjects with option-like incentives since it increases their expected payout.JEL classification: C92, D84, G10.

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Section: Experimental Treatmentsmentioning

confidence: 99%

Do option-like incentives induce overvaluation? Evidence from experimental asset markets

Holmén¹,

Kirchler²,

Kleinlercher³

2014

Journal of Economic Dynamics and Control

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“…8 While we only report here a benchmark case, our results are qualitatively robust with respect to the choice of parameters, unless otherwise noted.…”

Section: Comparative Staticsmentioning

confidence: 70%

On managerial risk-taking incentives when compensation may be hedged against

2014

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We consider a continuous time principal-agent model where the principal/firm compensates an agent/manager who controls the output's exposure to risk and its expected return.Both the firm and the manager have exponential utility and can trade in a frictionless market. When the firm observes the manager's choice of effort and volatility, there is an optimal contract that induces the manager to not hedge. In a two factor specification of the model where an index and a bond are traded, the optimal contract is linear in output and the log return of the index. We also consider a manager who receives exogenous share or option compensation and illustrate how risk taking depends on the relative size of the systematic and firm-specific risk premia of the output and index. Whilst in most cases, options induce greater risk taking than shares, we find that there are also situations under which the hedging manager may take less risk than the non-hedging manager.

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“…Both assumptions are established by the related literature and are taken as given in this paper. First, fund managers are compensated with a management fee based on their net assets according to Khorana (1996), Jans and Otten (2008), and Cuoco and Kaniel (2011). Consequently, fund managers' fees are maximized when assets under management are maximized.…”

Section: Small Fund Industry Modelmentioning

confidence: 99%

“…Brennan and Li (2008) find that the delegation decision of asset management leads to increased prices and lower returns of assets correlated with important benchmarks. Cuoco and Kaniel (2011) derive a general equilibrium in which fund managers bias their portfolio toward benchmark stocks. Basak and Pavlova (2013) explain that the buying behavior of asset managers generates asset-class effects.…”

Section: Introductionmentioning

confidence: 99%

Fund Flows Inducing Mispricing of Risk in Competitive Financial Markets

Stahmer

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means -electronic, mechanical, photocopying, recording, or otherwise -without the permission of ESMT. JEL classification: D53, D80, G01, G02, G11, G12, G20 * European School of Management and Technology (ESMT) Berlin, Germany, e-mail: axel.stahmer@esmt.org. Special thanks are due to Joerg Rocholl and Paul Heidhues for their extraordinary support and many useful comments that helped improve this paper. I am grateful to the ESMT and Humboldt University seminar participants, in particular Guillermo Baquero and Sascha Steffen as well as Christoph Wagner, Dora Simroth and Benedikt Meyer-Bretschneider for their constructive input. All errors are my own. I also wish to thank the JP Morgan team, which helped develop the paper idea. Terms of use: Documents in

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Equilibrium prices in the presence of delegated portfolio management

Cited by 268 publications

References 47 publications

Do option-like incentives induce overvaluation? Evidence from experimental asset markets

Do option-like incentives induce overvaluation? Evidence from experimental asset markets

On managerial risk-taking incentives when compensation may be hedged against

Fund Flows Inducing Mispricing of Risk in Competitive Financial Markets

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