Delegated Portfolio Management, Benchmarking, and the Effects on Financial Markets

September 8, 2015

Preview Citation

Format: Chicago

Deniz O Igan, and Marcelo Pinheiro. Delegated Portfolio Management, Benchmarking, and the Effects on Financial Markets, (USA: International Monetary Fund, 2015) accessed December 25, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We analyze the implications of linking the compensation of fund managers to the return of their portfolio relative to that of a benchmark—a common solution to the agency problem in delegated portfolio management. In the presence of such relativeperformance- based objectives, investors have reduced expected utility but markets are typically more informative and deeper. Furthermore, in a multiple asset/market framework we show that (i) relative performance concerns lead to an increase in the correlation between markets (financial contagion); (ii) benchmark inclusion increases price volatility; (iii) home bias emerges as a rational outcome. When information is costly, information acquisition is hindered and this attenuates the effects on informativeness and depth of the market.

Subject: Inflation, Liquidity, Mutual funds, Securities markets, Stocks

Keywords: WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/198
Stock No:

WPIEA2015198
ISBN:

9781513586878
ISSN:

1018-5941

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