Delegated portfolio management, optimal fee contracts, and asset prices

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

This paper proposes a model of asset-market equilibrium with portfolio delegation and optimal fee contracts. Fund managers and investors strategically interact to determine funds' investment profiles, while they share portfolio risk through fee contracts. In equilibrium, their investment decisions, fee schedules, and stock price feed back into one another. The model predicts that (1) stock market's expected return and volatility increase as more investor capital is intermediated by funds, (2) fund's expense ratio is stable despite volatile market, (3) aggregate fund flow is positively (inversely) related to subsequent (past) market return, and (4) funds provide investors with a volatility hedge by adjusting market exposure counter-cyclically.

Original languageEnglish
Pages (from-to)360-389
Number of pages30
JournalJournal of Economic Theory
Volume165
DOIs
Publication statusPublished - 2016 Sep 1

    Fingerprint

Keywords

  • Asset prices
  • Fund return
  • Fund size
  • Optimal fee
  • Portfolio delegation
  • Price volatility

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this