Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/150074 
Year of Publication: 
2006
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 1 [Issue:] 1 [Publisher:] The Econometric Society [Place:] New York, NY [Year:] 2006 [Pages:] 67-93
Publisher: 
The Econometric Society, New York, NY
Abstract: 
What are the equilibrium features of a financial market where a sizeable proportion of traders face reputational concerns? This question is central to our understanding of financial markets, which 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 embed it in an asset pricing framework. We thus provide a formal model of financial equilibrium with career concerned agents. 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 <i>churn</i>, i.e., to engage in trading even when they face a negative expected return. Churners act as noise traders and enhance the level of 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.
Subjects: 
Career concerns
financial equilibrium
trade volume
JEL: 
G0
C7
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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