Fund Managers, Career Concerns, and Asset Price Volatility
42 Pages Posted: 20 Jul 2011
There are 4 versions of this paper
Fund Managers, Career Concerns, and Asset Price Volatility
Fund Managers, Career Concerns, and Asset Price Volatility
Fund Managers, Career Concerns, and Asset Price Volatility
Fund Managers, Career Concerns, and Asset Price Volatility
Date Written: June 2011
Abstract
We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on the default risk. Looking at the past performance, investors update beliefs on their managers and make firing decisions. This leads to career concerns which a¤ect investment decisions, generating a counter-cyclical 'reputational premium.' When default risk is high, the bonds return is high to compensate uninformed managers for the high risk of being fired. As default risk changes over time, the reputational premium amplifies price volatility.
Keywords: amplification, career concerns, delegated portfolio management
JEL Classification: D53, D8, G1
Suggested Citation: Suggested Citation
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