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Rewarding trading skills without inducing gambling

Makarov, Igor and Plantin, Guillaume (2015) Rewarding trading skills without inducing gambling. The Journal of Finance, 70 (3). pp. 925-962. ISSN 0022-1082

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Identification Number: 10.1111/jofi.12257

Abstract

This paper develops a model of active asset management in which fund managers may forgo alpha‐generating strategies, preferring instead to make negative‐alpha trades that enable them to temporarily manipulate investors' perceptions of their skills. We show that such trades are optimally generated by taking on hidden tail risk, and are more likely to occur when fund managers are impatient and when their trading skills are scalable, and generate a high profit per unit of risk. We propose long‐term contracts that deter this behavior by dynamically adjusting the dates on which the manager is compensated in response to her cumulative performance.

Item Type: Article
Official URL: https://onlinelibrary.wiley.com/journal/15406261
Additional Information: © 2015 the American Finance Association
Divisions: Finance
Subjects: H Social Sciences > HG Finance
Sets: Departments > Finance
Date Deposited: 08 Jun 2018 09:54
Last Modified: 20 Sep 2019 02:05
URI: http://eprints.lse.ac.uk/id/eprint/88235

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