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Performance Evaluation and Financial Market Runs

36 Pages Posted: 14 Jul 2006 Last revised: 24 Jun 2011

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Date Written: June 24, 2011

Abstract

This paper develops a model in which performance evaluation causes runs by fund managers and results in asset fire-sales. Performance evaluation nonetheless is efficient as it disciplines managers. Optimal performance evaluation combines absolute and relative components in order to make runs less likely. When runs induce large price discounts, this requires a high degree of absolute performance evaluation and a low degree of relative performance evaluation. The overall costs of using performance evaluation are shown to be decreasing in asset liquidity, implying that more developed financial markets should have more delegation. However, such markets are not less prone to runs since higher delegation offsets the stability-enhancing impact of asset liquidity.

Keywords: absolute and relative performance evaluation, financial market runs, fire-sales, asset liquidity

JEL Classification: G23, G28

Suggested Citation

Wagner, Wolf, Performance Evaluation and Financial Market Runs (June 24, 2011). Available at SSRN: https://ssrn.com/abstract=914501 or http://dx.doi.org/10.2139/ssrn.914501

Wolf Wagner (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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