Managerial Incentives and Financial Contagion

October 1, 2004

Preview Citation

Format: Chicago

Sujit Chakravorti, and Subir Lall. Managerial Incentives and Financial Contagion, (USA: International Monetary Fund, 2004) accessed December 23, 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

This paper proposes a framework for comovements of asset prices with seemingly unrelated fundamentals, as an outcome of optimal portfolio strategies by fund managers. In emerging markets, dedicated managers outperforming a benchmark index and global managers maximizing absolute returns lead to systematic interactions between asset prices, without asymmetric information. The model determines optimal portfolio weights, the incidence of relative value strategies, and the systematic deviation of prices from fundamentals with limits to arbitraging this differential. Managerial compensation contracts, optimal at the firm level, may lead to inefficiencies at the macroeconomic level. Conditions are identified when shocks in one emerging market affect others.

Subject: Asset prices, Currencies, Emerging and frontier financial markets, Financial institutions, Financial markets, Hedge funds, Money, Prices, Securities markets

Keywords: Asset prices, Asset volatility, Currencies, Emerging and frontier financial markets, Emerging market, Emerging market asset, Financial Crises, Fund manager, Global, Global Linkages, Hedge funds, Index Investors, Investor base, Market asset return, Market assets, Optimal portfolio, Securities markets, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/199
Stock No:

WPIEA1992004
ISBN:

9781451860146
ISSN:

1018-5941

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