Abstract

https://ssrn.com/abstract=1342876
 
 

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How Does Illiquidity Affect Delegated Portfolio Choice?


Min Dai


National University of Singapore (NUS) - Department of Mathematics

Luis Goncalves-Pinto


National University of Singapore

Jing Xu


National University of Singapore (NUS) - Department of Mathematics

November 8, 2016

WFA 2010 Victoria Meetings Paper
EFA 2009 Bergen Meetings Paper

Abstract:     
In response to how they are compensated, mutual fund managers who are under-performing by mid-year are likely to increase the risk of their portfolios towards the year-end. We argue that an increase in the liquidity of the stocks that managers use as risk-shifting tools can lead to an increase in the size of their risky bets. This in turn hurts fund investors by increasing the costs of misaligned incentives associated with delegated portfolio management. We provide both theoretical and empirical results that are consistent with this argument. We use decimalization as an exogenous shock to liquidity to identify causal effects.

Number of Pages in PDF File: 78

Keywords: Mutual Funds, Risk Shifting, Portfolio Delegation, Stock Illiquidity

JEL Classification: C61, D11, D91, G11, G12, G23


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Date posted: February 16, 2009 ; Last revised: November 8, 2016

Suggested Citation

Dai, Min and Goncalves-Pinto, Luis and Xu, Jing, How Does Illiquidity Affect Delegated Portfolio Choice? (November 8, 2016). WFA 2010 Victoria Meetings Paper; EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1342876 or http://dx.doi.org/10.2139/ssrn.1342876

Contact Information

Min Dai
National University of Singapore (NUS) - Department of Mathematics ( email )
Singapore
Luis Goncalves-Pinto (Contact Author)
National University of Singapore ( email )
Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore
HOME PAGE: http://luis.goncalvespinto.com
Jing Xu
National University of Singapore (NUS) - Department of Mathematics ( email )
10 Kent Ridge Crescent
Singapore, 119260
Singapore
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