Strategic Asset Allocation in Money Management

46 Pages Posted: 20 Jul 2011

See all articles by Suleyman Basak

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Dmitry Makarov

ICEF, Higher School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2011

Abstract

Money managers behave strategically when competing for fund flows within relatively small groups. We study strategic interaction between two risk-averse managers in continuous time, characterizing analytically their unique equilibrium dynamic investments. Driven by chasing and contrarian mechanisms when one is well ahead, they gamble in the opposite direction when their performances are close. We also discuss multiple and mixed-strategy equilibria. Equilibrium policy of each crucially depends on the opponent's risk attitude. Hence, client investors, concerned about how a strategic manager may trade on their behalf, should also learn competitors' characteristics - as against non-strategic settings, where knowing a manager's own characteristics suffices to determine behavior.

Keywords: fund flows, incentives, Money Managers, portfolio choice, relative performance, risk shifting, strategic interactions, tournaments

JEL Classification: C61, C73, D81, G11, G20

Suggested Citation

Basak, Suleyman and Makarov, Dmitry, Strategic Asset Allocation in Money Management (June 2011). CEPR Discussion Paper No. DP8457. Available at SSRN: https://ssrn.com/abstract=1889960

Suleyman Basak (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
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HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Dmitry Makarov

ICEF, Higher School of Economics ( email )

26 Shabolovka
Moscow
Russia

HOME PAGE: http://www.nes.ru/~dmakarov

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