On the Size of the Active Management Industry

48 Pages Posted: 20 Jan 2010

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: January 2010

Abstract

We analyze the equilibrium size of the active management industry and the role of historical data---how investors use it to decide how much to invest in the industry, and how researchers use it to judge whether the industry's size is reasonable. As the industry's size increases, every manager's ability to outperform passive benchmarks declines, to an unknown degree. We find that researchers need not be puzzled by the industry's substantial size despite the industry's negative track record. We also find investors face endogeneity that limits their learning about returns to scale and allows prolonged departures of the industry's size from its optimal level.

Keywords: active management, learning, returns to scale

JEL Classification: G11, G12, G20, G23

Suggested Citation

Pastor, Lubos and Stambaugh, Robert F., On the Size of the Active Management Industry (January 2010). CEPR Discussion Paper No. DP7637. Available at SSRN: https://ssrn.com/abstract=1539309

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

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Robert F. Stambaugh

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
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United States
215-898-5734 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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