Delegation Uncertainty

71 Pages Posted: 25 Apr 2015 Last revised: 27 Nov 2018

See all articles by Ye Li

Ye Li

University of Washington - Foster School of Business

Chen Wang

University of Notre Dame - Mendoza College of Business

Date Written: November 19, 2018


Delegation bears an intrinsic form of uncertainty. Investors hire managers for their superior models of asset markets, but delegation outcome is uncertain precisely because managers' model is unknown to investors. We model investors' delegation decision as a trade-off between asset return uncertainty and delegation uncertainty. Our theory explains several puzzles on fund performances. It also delivers asset pricing implications supported by our empirical analysis: (1) because investors partially delegate and hedge against delegation uncertainty, CAPM alpha arises; (2) the cross-section dispersion of alpha increases in uncertainty; (3) managers bet on alpha, engaging in factor timing, but factors' alpha is immune to the rise of their arbitrage capital - when investors delegate more, delegation hedging becomes stronger. Finally, we offer a novel approach to extract model uncertainty from asset returns, delegation, and survey expectations.

Keywords: Model Uncertainty, Delegated Portfolio Management, Ambiguity Premium, Heterogeneous Belief, Cross-Sectional Asset Pricing

JEL Classification: D53, D81, D83, D84, G11, G40

Suggested Citation

Li, Ye and Wang, Chen, Delegation Uncertainty (November 19, 2018). Columbia Business School Research Paper No. 15-54, Fisher College of Business Working Paper No. 2018-03-022, Charles A. Dice Center Working Paper No. 2018-22, Available at SSRN: or

Ye Li (Contact Author)

University of Washington - Foster School of Business ( email )

Box 353200
Seattle, WA 98195
United States

HOME PAGE: http://

Chen Wang

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States


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