Abstract

http://ssrn.com/abstract=1360783
 
 

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A Model of Portfolio Delegation and Strategic Trading


Albert S. Kyle


University of Maryland; National Bureau of Economic Research (NBER)

Hui Ou-Yang


Cheung Kong Graduate School of Business

Bin Wei


Federal Reserve Board

May 1, 2010


Abstract:     
This paper endogenizes information acquisition and portfolio delegation in a one-period strategic trading model. The equilibrium concept constrains prices, demands, and contracts to be linear functions. We find that when the informed portfolio manager is relatively risk tolerant (averse), price informativeness increases (decreases) with the amount of noise trading. Our results differ from those obtained in the traditional market microstructure literature, in which price informativeness is independent of or decreases with the amount of noise trading. When noise trading is endogenized, the linear equilibrium in the traditional literature breaks down under a wide range of parameter values regarding the number, the risk aversion, and the endowment risk of noise traders. In contrast, a linear equilibrium always exists in our model. In a conventional portfolio delegation model under a competitive partial equilibrium, the manager's effort of acquiring information is independent of a linear incentive contract. In our strategic trading model, however, a higher powered linear contract induces the manager to exert more effort for information acquisition, but the manager's trading intensity can be either higher or lower.

Number of Pages in PDF File: 47

Keywords: Portfolio Delegation, Information Acquisition, Strategic Trading, Price Informativeness

JEL Classification: G14, G12, G11

working papers series


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Date posted: March 17, 2009 ; Last revised: July 16, 2010

Suggested Citation

Kyle, Albert S. and Ou-Yang, Hui and Wei, Bin, A Model of Portfolio Delegation and Strategic Trading (May 1, 2010). Available at SSRN: http://ssrn.com/abstract=1360783 or http://dx.doi.org/10.2139/ssrn.1360783

Contact Information

Albert (Pete) S. Kyle
University of Maryland ( email )
College Park, MD 20742
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Hui Ou-Yang
Cheung Kong Graduate School of Business ( email )
Hong Kong
China
852-5199-6227 (Phone)
Bin Wei (Contact Author)
Federal Reserve Board ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
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