Delegated Portfolio Management and Asset Pricing in the Era of Big Data

61 Pages Posted: 25 Apr 2015 Last revised: 25 Jul 2018

Ye Li

Ohio State University

Chen Wang

Yale School of Management

Date Written: June 30, 2018

Abstract

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

Li, Ye and Wang, Chen, Delegated Portfolio Management and Asset Pricing in the Era of Big Data (June 30, 2018). Columbia Business School Research Paper No. 15-54. Available at SSRN: https://ssrn.com/abstract=2598185 or http://dx.doi.org/10.2139/ssrn.2598185

Ye Li (Contact Author)

Ohio State University ( email )

Fisher Hall 836, 2100 Neil Ave
Columbus, OH 43210
United States

HOME PAGE: http://yeli-macrofinance.com

Chen Wang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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