Abstract

http://ssrn.com/abstract=1571545
 
 

References (25)



 
 

Citations (5)



 


 



Rewarding Trading Skills Without Inducing Gambling


Igor Makarov


London Business School

Guillaume Plantin


University of Toulouse 1 - Toulouse School of Economics (TSE)

April 2011

AFA 2011 Denver Meetings Paper

Abstract:     
This paper develops a model of active portfolio management in which fund managers may secretly gamble in order to manipulate their reputation and attract more funds. We show that such trading strategies may expose investors to severe losses and are more likely to occur when fund managers are impatient, their trading skills are scalable and generate a high profit per unit of risk. We study long-term contracts that deter this behavior. We show that contracts that simultaneously increase and defer the manager's expected fee after abnormally high returns eliminate risk-shifting incentives and implement the first-best.

Number of Pages in PDF File: 35

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Date posted: March 17, 2010 ; Last revised: May 20, 2011

Suggested Citation

Makarov, Igor and Plantin, Guillaume, Rewarding Trading Skills Without Inducing Gambling (April 2011). AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1571545 or http://dx.doi.org/10.2139/ssrn.1571545

Contact Information

Igor Makarov (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 (0)20 7000 8265 (Phone)
+44 (0)20 7000 8201 (Fax)
Guillaume Plantin
University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )
Place Anatole-France
Toulouse Cedex, F-31042
France
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