Fund Managers, Career Concerns, and Asset Price Volatility

Federal Reserve Bank of Minneapolis Staff Report 446

Posted: 28 May 2010

See all articles by Veronica Guerrieri

Veronica Guerrieri

University of Chicago - Booth School of Business

Peter Kondor

University of Chicago - Booth School of Business

Multiple version iconThere are 4 versions of this paper

Date Written: May 1, 2010

Abstract

We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on the default probability. Looking at the past performance, investors update beliefs on their managers and make firing decisions. This leads to career concerns which affect investment decisions, generating a positive or negative “reputational premium.” For example, when the default probability is high, the return on the risky bond has to be high to compensate the uninformed managers for the high risk of being fired. As the default probability changes over time, the reputational premium amplifies price volatility.

Keywords: asset prices, reputation, delegation, fund managers, volatility

JEL Classification: E44, G12, G2

Suggested Citation

Guerrieri, Veronica and Kondor, Peter, Fund Managers, Career Concerns, and Asset Price Volatility (May 1, 2010). Federal Reserve Bank of Minneapolis Staff Report 446 , Available at SSRN: https://ssrn.com/abstract=1612945

Veronica Guerrieri (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Peter Kondor

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
575
PlumX Metrics