Asset Management Contracts and Equilibrium Prices

98 Pages Posted: 8 Sep 2014 Last revised: 4 Feb 2019

See all articles by Andrea M. Buffa

Andrea M. Buffa

Boston University - Department of Finance & Economics

Dimitri Vayanos

London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Paul Woolley

London School of Economics & Political Science (LSE)

Multiple version iconThere are 3 versions of this paper

Date Written: January 27, 2019

Abstract

We study how the agency relationship between investors and asset managers affects equilibrium prices. We begin with a static contracting model, in which the optimal contract bounds managers’ portfolio risk regardless of their private information. We embed that model into an equilibrium asset-pricing model with noise traders and overlapping generations of investors and managers. Risk limits generate an inverted risk-return relationship: overvalued assets have high volatility because managers buy them during bull markets to meet risk limits. Because overvalued assets have higher share price and volatility, risk limits are more constraining when trading against overvaluation, biasing the aggregate market upward.

JEL Classification: D53, D86, D82, G11, G12

Suggested Citation

Buffa, Andrea M. and Vayanos, Dimitri and Woolley, Paul, Asset Management Contracts and Equilibrium Prices (January 27, 2019). Boston U. School of Management Research Paper No. 2492529. Available at SSRN: https://ssrn.com/abstract=2492529 or http://dx.doi.org/10.2139/ssrn.2492529

Andrea M. Buffa (Contact Author)

Boston University - Department of Finance & Economics ( email )

Questrom School of Business
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HOME PAGE: http://sites.google.com/site/andreabuffa/

Dimitri Vayanos

London School of Economics ( email )

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Center for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Paul Woolley

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

Houghton Street
London, WC2A 2AE
United Kingdom
44-20-7955-7477 (Phone)

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