Delegation Uncertainty in the Era of Big Data
75 Pages Posted: 25 Apr 2015 Last revised: 13 Oct 2018
Date Written: October 10, 2018
Big data analysis requires expertise and creates a division of labor and knowledge. We delegate tasks to professionals who possess better information, but delegation carries an intrinsic form of uncertainty - its outcome depends on professionals' knowledge that is unknown to us. This paper studies delegation uncertainty in financial markets. The theory offers explanation for several puzzles on delegated portfolio management. It also produces asset pricing implications supported by our empirical analysis: (1) CAPM alpha arises because investors partially delegate and hedge against delegation uncertainty; (2) the cross-section dispersion of alpha increases in uncertainty; (3) managers bet on alpha, but alpha is immune to the rise of their arbitrage capital - delegation hedging is stronger when investors delegate more. Finally, we offer a novel approach to measure uncertainty from asset returns, delegation, and survey expectations.
Keywords: Model Uncertainty, Big Data, Asset Management, Cross-Sectional Asset Pricing, CAPM Alpha
JEL Classification: D80, G11, G12, G14, G20
Suggested Citation: Suggested Citation