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Asset management as creator of market inefficiency

Vayanos, Dimitri ORCID: 0000-0002-0944-4914 and Woolley, Paul (2023) Asset management as creator of market inefficiency. Atlantic Economic Journal, 51 (1). pp. 1-11. ISSN 0197-4254

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Identification Number: 10.1007/s11293-023-09769-6


In this paper, we describe how agency frictions in asset management can generate prime violations of the Efficient Markets Hypothesis, such as momentum, value and an inverted risk-return relationship. Momentum in our theory is associated with procyclical fund flows and price over-reaction, and is more pronounced for overvalued assets. The investors who generate the momentum and who are losing from it are those requiring their asset managers to keep their portfolios close to benchmark indices. Our theory suggests a rethinking of asset management contracts. Contracts should employ measures of long-run risk and return, and benchmark indices that emphasize asset fundamentals. There should also be greater transparency on managers’ choice of strategies.

Item Type: Article
Official URL:
Additional Information: © 2023 The Authors
Divisions: Finance
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited: 28 Mar 2023 10:09
Last Modified: 07 Jul 2024 18:57

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