Asset Management Contracts and Equilibrium Prices

77 Pages Posted: 8 Sep 2014 Last revised: 21 Oct 2019

See all articles by Andrea M Buffa

Andrea M Buffa

University of Colorado at Boulder - Leeds School of Business

Dimitri Vayanos

London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Paul Woolley

London School of Economics & Political Science (LSE)

Multiple version iconThere are 3 versions of this paper

Date Written: October 19, 2019

Abstract

We derive equilibrium asset prices when fund managers deviate from benchmark indices to exploit noise-trader induced distortions but fund investors constrain these deviations. Because constraints force managers to buy assets that they underweight when these assets appreciate, overvalued assets have high volatility, and the risk-return relationship becomes inverted. Noise traders bias prices upward because constraints make it harder for managers to underweight overvalued assets, which have high volatility, than to overweight undervalued ones. We endogenize the constraints based on investors' uncertainty about managers' skill, and show that asset-pricing implications can be significant even for moderate numbers of unskilled managers.

JEL Classification: D53, D86, D82, G11, G12

Suggested Citation

Buffa, Andrea M and Vayanos, Dimitri and Woolley, Paul, Asset Management Contracts and Equilibrium Prices (October 19, 2019). Boston U. School of Management Research Paper No. 2492529, Available at SSRN: https://ssrn.com/abstract=2492529 or http://dx.doi.org/10.2139/ssrn.2492529

Andrea M Buffa (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Dimitri Vayanos

London School of Economics ( email )

A350
Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)20 7955 6382 (Phone)
+44 (0)20 7955 7420 (Fax)

Center for Economic Policy Research (CEPR)

London
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paul Woolley

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
44-20-7955-7477 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
587
Abstract Views
4,239
rank
53,492
PlumX Metrics