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Mutual fund tournament: risk taking incentives induced by ranking objectives

Goriaev, A., Palomino, Frédéric and Prat, Andrea (2000) Mutual fund tournament: risk taking incentives induced by ranking objectives. 94. Center for Economic Research, Tilburg University, Tilburg, The Netherlands.

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Abstract

There is now extensive empirical evidence showing that fund managers have relative performance objectives and adapt their investment strategy in the last part of the calendar year to their performance in the early part of the year. However, emphasis was put on returns in excess of some exogenous benchmark return. In this paper, we investigate whether fund managers have ranking objectives (as in a tournament). First, in a two-period model, we analyze the game played by two risk-neutral fund managers with ranking objectives. We derive conditions on the set of possible strategies under which the aggregate amount of risk undertaken in the late period is larger than in the ¯rst period. In the second part of the paper, we provide evidence that (i) funds have risk incentives generated by ranking objectives, (ii) risk induced by ranking objectives is mainly idiosyncratic, and (iii) risk incentives generated by ranking objectives are stronger for funds ranked in the top decile after the ¯rst part of the year.

Item Type: Monograph (Discussion Paper)
Official URL: http://center.uvt.nl
Additional Information: © 2000 the authors
Library of Congress subject classification: H Social Sciences > HG Finance
Journal of Economic Literature Classification System: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking; Venture Capital; Brokerage; Rating Agencies
Sets: Collections > Economists Online
Departments > Economics
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 94
Date Deposited: 02 Jun 2008 13:15
URL: http://eprints.lse.ac.uk/5237/

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