Career concerns in financial markets

Dasgupta, Amil ORCID: 0000-0001-8474-9470 and Prat, Andrea (2004) Career concerns in financial markets. Financial Markets Group Discussion Papers (494). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

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 financial 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 flows 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)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2004 The Authors
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	G - Financial Economics > G0 - General > G00 - General C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C70 - General
Date Deposited:	05 Aug 2009 11:01
Last Modified:	01 Oct 2024 03:17
URI:	http://eprints.lse.ac.uk/id/eprint/24706

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