Strategic Asset Allocation in Money Management
London Business School; Centre for Economic Policy Research (CEPR)
New Economic School
CEPR Discussion Paper No. DP8457
Money managers behave strategically when competing for fund flows within relatively small groups. We study strategic interaction between two risk-averse managers in continuous time, characterizing analytically their unique equilibrium dynamic investments. Driven by chasing and contrarian mechanisms when one is well ahead, they gamble in the opposite direction when their performances are close. We also discuss multiple and mixed-strategy equilibria. Equilibrium policy of each crucially depends on the opponent's risk attitude. Hence, client investors, concerned about how a strategic manager may trade on their behalf, should also learn competitors' characteristics - as against non-strategic settings, where knowing a manager's own characteristics suffices to determine behavior.
Number of Pages in PDF File: 46
Keywords: fund flows, incentives, Money Managers, portfolio choice, relative performance, risk shifting, strategic interactions, tournaments
JEL Classification: C61, C73, D81, G11, G20working papers series
Date posted: July 20, 2011
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 1.437 seconds