Equilibrium Prices in the Presence of Delegated Portfolio Management

36 Pages Posted: 15 Jan 2001

See all articles by Domenico Cuoco

Domenico Cuoco

University of Pennsylvania - Finance Department

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: December 2006

Abstract

The paper analyzes asset pricing implications of commonly used performance fees linking the compensation of fund managers to the return of the managed portfolio relative to that of a benchmark portfolio. Symmetric(fulcrum) performance fees distort the allocation of managed portfolios in a way that induces a significant positive effect on the equilibrium prices of stocks included in the benchmark portfolio, a significant negative effect on their equilibrium Sharpe ratios, and a small positive effect on their equilibrium volatilities: these implications of the model are consistent with the available empirical evidence. For Asymmetric performance fees, the signs of differentials between equilibrium stock prices, Sharpe ratios and volatilities of stocks included in the benchmark portfolio and stocks excluded from the benchmark fluctuate stochastically over time, as funds performance relative to the benchmark varies.

Suggested Citation

Cuoco, Domenico and Kaniel, Ron, Equilibrium Prices in the Presence of Delegated Portfolio Management (December 2006). AFA 2001 New Orleans Meetings. Available at SSRN: https://ssrn.com/abstract=249971 or http://dx.doi.org/10.2139/ssrn.249971

Domenico Cuoco

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Ron Kaniel (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

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