Competition in Portfolio Management: Theory and Experiment

47 Pages Posted: 18 Mar 2010 Last revised: 3 Dec 2012

See all articles by Elena N. Asparouhova

Elena N. Asparouhova

University of Utah - David Eccles School of Business

Peter Bossaerts

University of Melbourne - Department of Finance

Jernej Copic

Yale University - Cowles Foundation

Bradford Cornell

California Institute of Technology

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences

Debrah Meloso

Toulouse Business School

Date Written: May 21, 2012

Abstract

We develop a new theory of delegated investment whereby managers compete in terms of composition of the portfolios they promise to acquire. We study the resulting asset pricing in the inter-manager market. We incentivize investors so that we obtain sharp predictions. Managers are paid a fixed fraction of fund size. In equilibrium, investors choose managers who offer portfolios that mimic Arrow-Debreu (state) securities. Prices in the inter-manager market are predicted to satisfy a weak version of the CAPM: state-price probability ratios implicit in prices of traded assets decrease in aggregate wealth across states. An experiment involving about one hundred participants over six weeks broadly supports the theoretical predictions. Pricing quality declines, however, when fund concentration increases because funds flow towards managers who offer portfolios closer to Arrow-Debreu securities (as in the theory) and who had better recent performance (an observation unrelated to theory).

Keywords: asset pricing, CAPM, delegated portfolio management, mutual fund flows, experimental finance

JEL Classification: G11, C92, D53, D03

Suggested Citation

Asparouhova, Elena N. and Bossaerts, Peter L. and Copic, Jernej and Cornell, Bradford and Cvitanic, Jaksa and Meloso, Debrah C, Competition in Portfolio Management: Theory and Experiment (May 21, 2012). Available at SSRN: https://ssrn.com/abstract=1573198 or http://dx.doi.org/10.2139/ssrn.1573198

Elena N. Asparouhova

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Peter L. Bossaerts (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Department of Finance
Carlton, Victoria 3010
Australia

HOME PAGE: http://bmmlab.org

Jernej Copic

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
302 4326258 (Phone)

HOME PAGE: http://www.hss.caltech.edu/~jernej

Bradford Cornell

California Institute of Technology ( email )

Pasadena, CA 91125
United States
310-825-2922 (Phone)
310-206-5455 (Fax)

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

HOME PAGE: http://www.hss.caltech.edu/~cvitanic/

Debrah C Meloso

Toulouse Business School ( email )

20, bd Lascrosses
Toulouse, 31068
France

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