Dasgupta, Amil and Prat, Andrea (2004) Career concerns in financial markets. Discussion paper, 494. Financial Markets Group, London School of Economics and Political Science, London, UK.
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What are the equilibrium features of a market where a sizeable portion of traders face career concerns? This question is central to our understanding of Þnancial markets that are increasingly dominated by institutional investors. We construct a model of delegated portfolio management that captures key features of the US mutual fund industry and we embed it into an asset pricing set-up. Fund managers differ in their ability to understand market fundamentals, and in every period investors choose a fund. In equilibrium, the presence of career concerns induces uninformed fund managers to churn, i.e. to engage in trading even when they face a negative expected return. As churning plays the role of noise trading, the asset market displays non-fully informative prices and positive (and high) trading volume. The equilibrium relationship between fund return and net fund ßows displays a skewed shape that is consistent with stylized facts. The robustness of our core results is probed from several angles.
|Item Type:||Monograph (Discussion Paper)|
|Additional Information:||© 2004 The Authors|
|Library of Congress subject classification:||H Social Sciences > HB Economic Theory|
|Sets:||Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
|Date Deposited:||05 Aug 2009 11:01|
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