Buffa, Andrea M., Vayanos, Dimitri ORCID: 0000-0002-0944-4914 and Woolley, Paul (2022) Asset management contracts and equilibrium prices. Journal of Political Economy, 130 (12). 3146 - 3201. ISSN 0022-3808
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Abstract
We model asset management as a continuum between active and passive: managers can deviate from benchmark indices to exploit noise-trader induced distortions, but agency frictions constrain these deviations. Because constraints force managers to buy assets that they underweight when these assets appreciate, overvalued assets have high volatility, and the risk-return relationship becomes inverted. Distortions are more severe for overvalued assets than for undervalued ones because trading against the former entails more risk and tighter constraints. We provide empirical evidence supporting our model’s main mechanisms. Using the data, we infer the constraints’ tightness and compute a measure of effective arbitrage capital.
Item Type: | Article |
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Official URL: | https://www.journals.uchicago.edu/toc/jpe/current |
Additional Information: | © 2022 The Authors |
Divisions: | Finance LSE |
Subjects: | H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HG Finance |
Date Deposited: | 02 Mar 2022 11:27 |
Last Modified: | 02 Nov 2024 08:09 |
URI: | http://eprints.lse.ac.uk/id/eprint/113889 |
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