Equilibrium Prices in the Presence of Delegated Portfolio Management

66 Pages Posted: 7 Oct 2009

See all articles by Domenico Cuoco

Domenico Cuoco

University of Pennsylvania - Finance Department

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: September 2009

Abstract

This paper analyzes the asset pricing implications of commonly-used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a benchmark portfolio. The contract parameters, the extent of delegation and equilibrium prices are all determined endogenously within the model we consider. Symmetric ("fulcrum") performance fees distort the allocation of managed portfolios in a way that induces a significant and unambiguous positive effect on the prices of the assets included in the benchmark and a negative effect on the Sharpe ratios. Asymmetric performance fees have more complex effects on equilibrium prices and Sharpe ratios, with the signs of these effects fluctuating stochastically over time in response to variations in the fundsÂ’ excess performance.

Keywords: delegation, equilibrium, fund, portfolio

JEL Classification: D40, D50, G11, G12, G20

Suggested Citation

Cuoco, Domenico and Kaniel, Ron, Equilibrium Prices in the Presence of Delegated Portfolio Management (September 2009). CEPR Discussion Paper No. DP7453. Available at SSRN: https://ssrn.com/abstract=1484486

Domenico Cuoco

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Ron Kaniel (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

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