Delegated Portfolio Management and Asset Pricing in the Era of Big Data
61 Pages Posted: 25 Apr 2015 Last revised: 25 Jul 2018
Date Written: June 30, 2018
Big data creates a division of knowledge - asset managers use big data and professional techniques to estimate the probability distribution of asset returns, while investors face model uncertainty. Model uncertainty offers a new perspective to understand delegation, which, for example, reconciles the growth of asset management industry and its lack of convincing performance. Delegation fundamentally transforms the role of model uncertainty in asset pricing by inducing a hedging motive of investors that increases with the level of delegation. It explains patterns ("anomalies") in the cross-section of asset returns and offers practical guidance to identify alpha that is robust to the rise of arbitrage capital. We provide evidence that supports the assumptions and predictions of our theory.
Keywords: Model Uncertainty, Big Data, Asset Management, Cross-Sectional Asset Pricing, Alpha
JEL Classification: D80, G11, G12, G14, G20
Suggested Citation: Suggested Citation