Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/150074
Authors: 
Prat, Andrea
Dasgupta, Amil
Year of Publication: 
2006
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 1 [Year:] 2006 [Issue:] 1 [Pages:] 67-93
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: 
https://creativecommons.org/licenses/by-nc/2.5
Document Type: 
Article

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.