Asset Management Contracts and Equilibrium Prices

94 Pages Posted: 8 Sep 2014 Last revised: 30 Jun 2022

See all articles by Andrea M Buffa

Andrea M Buffa

University of Colorado at Boulder - Leeds School of Business

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: March 29, 2022

Abstract

We model asset management as a continuum between active and passive: managers can deviate from benchmark indices to exploit noise-trader induced distortions, but agency frictions constrain these deviations. Because constraints force managers to buy assets that they underweight when these assets appreciate, overvalued assets have high volatility, and the risk-return relationship becomes inverted. Distortions are more severe for overvalued assets than for undervalued ones because trading against the former entails more risk and tighter constraints. We provide empirical evidence supporting our model’s main mechanisms. Using the data, we infer the constraints’ tightness and compute a measure of effective arbitrage capital.

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

Suggested Citation

Buffa, Andrea M and Vayanos, Dimitri and Woolley, Paul, Asset Management Contracts and Equilibrium Prices (March 29, 2022). Boston University Questrom School of Business 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)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Dimitri Vayanos

London School of Economics ( email )

A350
Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)20 7955 6382 (Phone)
+44 (0)20 7955 7420 (Fax)

Center for Economic Policy Research (CEPR)

London
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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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