Cookies?
Library Header Image
LSE Research Online LSE Library Services

Asset management contracts and equilibrium prices

Buffa, Andrea M., Vayanos, Dimitri and Woolley, Paul (2022) Asset management contracts and equilibrium prices. Journal of Political Economy. ISSN 0022-3808 (In Press)

[img] Text (BVW_AMCEP_11) - Accepted Version
Pending embargo until 1 January 2100.
Available under License Creative Commons Attribution Non-commercial.

Download (1MB) | Request a copy

Identification Number: 10.1086/720515

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
Official URL: https://www.journals.uchicago.edu/toc/jpe/current
Additional Information: © 2022 The University of Chicago.
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: 14 Jun 2022 08:57
URI: http://eprints.lse.ac.uk/id/eprint/113889

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics