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T-Space at The University of Toronto Libraries >
Theoretical Economics >
Volume 1, Number 1 (March 2006) >

Please use this identifier to cite or link to this item: http://hdl.handle.net/1807/4781

Title: Financial equilibrium with career concerns
Authors: Dasgupta, Amil; LSE
Prat, Andrea; LSE
Keywords: Career concerns, financial equilibrium, trade volume
G0, C7
Issue Date: 2-Mar-2006
Publisher: Theoretical Economics
Citation: Theoretical Economics; Vol 1, No 1 (2006), pages 67-93
Abstract: [This item is a preserved copy. To view the original, visit http://econtheory.org/] 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.
URI: http://hdl.handle.net/1807/4781
Other Identifiers: http://econtheory.org/ojs/index.php/te/article/view/20060067
Rights: Authors who publish in <i>Theoretical Economics</i> will release their articles under the <a href="http://creativecommons.org/licenses/by-nc/2.5/">Creative Commons Attribution-NonCommercial license</a>. This license allows anyone to copy and distribute the article for non-commercial purposes provided that appropriate attribution is given.
Appears in Collections:Volume 1, Number 1 (March 2006)

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