TY - JOUR
T1 - Delegated portfolio management, optimal fee contracts, and asset prices
AU - Sato, Yuki
N1 - Funding Information:
I benefited from suggestions from Xavier Vives (the editor) and two anonymous referees. For helpful comments, I thank Elias Albagli, Margaret Bray, Amil Dasgupta, Bernard Dumas, Vincent Fardeau, Itay Goldstein, Amit Goyal, Denis Gromb, Stéphane Guibaud, Joel Peress, Norman Schürhoff, Dimitri Vayanos, and seminar participants at INSEAD and London School of Economics. Financial support from the Swiss Finance Institute and the Paul Woolley Centre for the Study of Capital Market Dysfunctionality at LSE is gratefully acknowledged. All errors and omissions are my own.
Publisher Copyright:
© 2016 Elsevier Inc.
PY - 2016/9/1
Y1 - 2016/9/1
N2 - This paper proposes a model of asset-market equilibrium with portfolio delegation and optimal fee contracts. Fund managers and investors strategically interact to determine funds' investment profiles, while they share portfolio risk through fee contracts. In equilibrium, their investment decisions, fee schedules, and stock price feed back into one another. The model predicts that (1) stock market's expected return and volatility increase as more investor capital is intermediated by funds, (2) fund's expense ratio is stable despite volatile market, (3) aggregate fund flow is positively (inversely) related to subsequent (past) market return, and (4) funds provide investors with a volatility hedge by adjusting market exposure counter-cyclically.
AB - This paper proposes a model of asset-market equilibrium with portfolio delegation and optimal fee contracts. Fund managers and investors strategically interact to determine funds' investment profiles, while they share portfolio risk through fee contracts. In equilibrium, their investment decisions, fee schedules, and stock price feed back into one another. The model predicts that (1) stock market's expected return and volatility increase as more investor capital is intermediated by funds, (2) fund's expense ratio is stable despite volatile market, (3) aggregate fund flow is positively (inversely) related to subsequent (past) market return, and (4) funds provide investors with a volatility hedge by adjusting market exposure counter-cyclically.
KW - Asset prices
KW - Fund return
KW - Fund size
KW - Optimal fee
KW - Portfolio delegation
KW - Price volatility
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U2 - 10.1016/j.jet.2016.05.002
DO - 10.1016/j.jet.2016.05.002
M3 - Article
AN - SCOPUS:84971638480
SN - 0022-0531
VL - 165
SP - 360
EP - 389
JO - Journal of Economic Theory
JF - Journal of Economic Theory
ER -