Delegated portfolio management, optimal fee contracts, and asset prices

Research output: Contribution to journalArticle

1 Citation (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
Externally publishedYes

Fingerprint

Delegated portfolio management
Fees
Asset prices
Investors
Portfolio risk
Asset markets
Hedge
Investment decision
Delegation
Schedule
Market equilibrium
Fund flows
Investment funds
Expected returns
Stock market
Stock prices
Expenses
Fund managers
Market returns

Keywords

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

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Delegated portfolio management, optimal fee contracts, and asset prices. / Sato, Yuki.

In: Journal of Economic Theory, Vol. 165, 01.09.2016, p. 360-389.

Research output: Contribution to journalArticle

@article{7039768cad54461c9ba547abae08203d,
title = "Delegated portfolio management, optimal fee contracts, and asset prices",
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.",
keywords = "Asset prices, Fund return, Fund size, Optimal fee, Portfolio delegation, Price volatility",
author = "Yuki Sato",
year = "2016",
month = "9",
day = "1",
doi = "10.1016/j.jet.2016.05.002",
language = "English",
volume = "165",
pages = "360--389",
journal = "Journal of Economic Theory",
issn = "0022-0531",
publisher = "Academic Press Inc.",

}

TY - JOUR

T1 - Delegated portfolio management, optimal fee contracts, and asset prices

AU - Sato, Yuki

PY - 2016/9/1

Y1 - 2016/9/1

N2 - 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.

AB - 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.

KW - Asset prices

KW - Fund return

KW - Fund size

KW - Optimal fee

KW - Portfolio delegation

KW - Price volatility

UR - http://www.scopus.com/inward/record.url?scp=84971638480&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84971638480&partnerID=8YFLogxK

U2 - 10.1016/j.jet.2016.05.002

DO - 10.1016/j.jet.2016.05.002

M3 - Article

AN - SCOPUS:84971638480

VL - 165

SP - 360

EP - 389

JO - Journal of Economic Theory

JF - Journal of Economic Theory

SN - 0022-0531

ER -