Fund Managers, Career Concerns, and Asset Price Volatility

42 Pages Posted: 20 Jul 2011

See all articles by Veronica Guerrieri

Veronica Guerrieri

University of Chicago - Booth School of Business

Peter Kondor

London School of Economics & Political Science (LSE); Central European University (CEU)

Multiple version iconThere are 4 versions of this paper

Date Written: June 2011

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 risk. Looking at the past performance, investors update beliefs on their managers and make firing decisions. This leads to career concerns which a¤ect investment decisions, generating a counter-cyclical 'reputational premium.' When default risk is high, the bond’s return is high to compensate uninformed managers for the high risk of being fired. As default risk changes over time, the reputational premium amplifies price volatility.

Keywords: amplification, career concerns, delegated portfolio management

JEL Classification: D53, D8, G1

Suggested Citation

Guerrieri, Veronica and Kondor, Peter, Fund Managers, Career Concerns, and Asset Price Volatility (June 2011). CEPR Discussion Paper No. DP8454, Available at SSRN: https://ssrn.com/abstract=1889957

Veronica Guerrieri (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Peter Kondor

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://fmg.lse.ac.uk/~kondor

Central European University (CEU) ( email )

Nador utca 9
Budapest, H-1051
Hungary

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