IDEAS home Printed from https://ideas.repec.org/a/bla/jfinan/v69y2014i1p179-217.html
   My bibliography  Save this article

Strategic Asset Allocation in Money Management

Author

Listed:
  • SULEYMAN BASAK
  • DMITRY MAKAROV

Abstract

type="main"> This paper analyzes the dynamic portfolio choice implications of strategic interaction among money managers who compete for fund flows. We study such interaction between two risk-averse managers in continuous time, characterizing analytically their unique equilibrium investments. Driven by chasing and contrarian mechanisms when one is well ahead, they gamble in the opposite direction when their performance is close. We also examine multiple and mixed-strategy equilibria. Equilibrium policy of each manager crucially depends on the opponent's risk attitude. Hence, client investors concerned about how a strategic manager may trade on their behalf should also learn competitors' characteristics.

Suggested Citation

  • Suleyman Basak & Dmitry Makarov, 2014. "Strategic Asset Allocation in Money Management," Journal of Finance, American Finance Association, vol. 69(1), pages 179-217, February.
    • Handle: RePEc:bla:jfinan:v:69:y:2014:i:1:p:179-217
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/jofi.12106
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Main Huong Nguyen & Eric Hahn & Katja Wingenfeld & Iris T Graef-Calliess & Anita von Poser & Malte Stopsack & Hannah Burian & Annegret Dreher & Simon Wolf & Michael Dettling & Ronald Burian & Albert D, 2017. "Acculturation and severity of depression among first-generation Vietnamese outpatients in Germany," International Journal of Social Psychiatry, , vol. 63(8), pages 708-716, December.
    2. Paul Boreham & Richard Hall & Bill Harley, 1996. "Two Paths to Prosperity?: Work Organisation and Industrial Relations Decentralisation in Australia," Work, Employment & Society, British Sociological Association, vol. 10(3), pages 449-468, September.
    3. Loranth Gyongyi & Sciubba Emanuela, 2006. "Relative Performance, Risk and Entry in the Mutual Fund Industry," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(1), pages 1-28, September.
    4. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    5. Michael R. Baye & Guoqiang Tian & Jianxin Zhou, 1993. "Characterizations of the Existence of Equilibria in Games with Discontinuous and Non-quasiconcave Payoffs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(4), pages 935-948.
    6. Jennifer N. Carpenter, 2000. "Does Option Compensation Increase Managerial Risk Appetite?," Journal of Finance, American Finance Association, vol. 55(5), pages 2311-2331, October.
    7. Subir Bose & Gerhard Orosel & Marco Ottaviani & Lise Vesterlund, 2006. "Dynamic monopoly pricing and herding," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 910-928, December.
    8. Huang, Wei, 2007. "Financial integration and the price of world covariance risk: Large- vs. small-cap stocks," Journal of International Money and Finance, Elsevier, vol. 26(8), pages 1311-1337, December.
    9. Jérôme B. Detemple & Ren Garcia & Marcel Rindisbacher, 2003. "A Monte Carlo Method for Optimal Portfolios," Journal of Finance, American Finance Association, vol. 58(1), pages 401-446, February.
    10. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    11. Suleyman Basak & Alex Shapiro & Lucie Teplá, 2006. "Risk Management with Benchmarking," Management Science, INFORMS, vol. 52(4), pages 542-557, April.
    12. Goriaev, A.P. & Palomino, F.A. & Prat, A., 2000. "Mutual Fund Tournament : Risk Taking Incentives Induced by Ranking Objectives," Discussion Paper 2000-94, Tilburg University, Center for Economic Research.
    13. Anand M. Goel & Anjan V. Thakor, 2005. "Green with Envy: Implications for Corporate Investment Distortions," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2255-2288, November.
    14. Juan‐Pedro Gómez & Richard Priestley & Fernando Zapatero, 2009. "Implications of Keeping‐Up‐with‐the‐Joneses Behavior for the Equilibrium Cross Section of Stock Returns: International Evidence," Journal of Finance, American Finance Association, vol. 64(6), pages 2703-2737, December.
    15. R. P. Agarwal & Donal O'Regan, 2004. "Essential 𝒰 c κ -type maps and Birkhoff-Kellogg theorems," International Journal of Stochastic Analysis, Hindawi, vol. 2004, pages 1-8, January.
    16. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, vol. 96(5), pages 1821-1834, December.
    17. Russell Cooper & Andrew John, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(3), pages 441-463.
    18. Guercio, Diane Del & Tkac, Paula A., 2008. "Star Power: The Effect of Monrningstar Ratings on Mutual Fund Flow," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(4), pages 907-936, December.
    19. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    20. Jaksa Cvitanic & Levon Goukasian & Fernando Zapatero, 2000. "Monte Carlo Valuation of Optimal Portfolios in Complete Markets," Econometric Society World Congress 2000 Contributed Papers 1246, Econometric Society.
    21. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-661, September.
    22. DeMarzo, Peter & Kaniel, Ron & Kremer, Ilan, 2007. "Technological innovation and real investment booms and busts," Journal of Financial Economics, Elsevier, vol. 85(3), pages 735-754, September.
    23. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    24. Daiki Maki, 2008. "The Performance of Variance Ratio Unit Root Tests Under Nonlinear Stationary TAR and STAR Processes: Evidence from Monte Carlo Simulations and Applications," Computational Economics, Springer;Society for Computational Economics, vol. 31(1), pages 77-94, February.
    25. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
    26. Suleyman Basak & Anna Pavlova & Alexander Shapiro, 2007. "Optimal Asset Allocation and Risk Shifting in Money Management," The Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1583-1621, 2007 21.
    27. Jennifer Carpenter, 1999. "Does Option Compensation Increase Managerial Risk Appetite?," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-076, New York University, Leonard N. Stern School of Business-.
    28. Peter M. DeMarzo & Ron Kaniel & Ilan Kremer, 2008. "Relative Wealth Concerns and Financial Bubbles," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 19-50, January.
    29. Alexander Kempf & Stefan Ruenzi, 2008. "Tournaments in Mutual-Fund Families," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 1013-1036, April.
    30. Palomino, Frederic, 2005. "Relative performance objectives in financial markets," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 351-375, July.
    31. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-479, June.
    32. José‐Miguel Gaspar & Massimo Massa & Pedro Matos, 2006. "Favoritism in Mutual Fund Families? Evidence on Strategic Cross‐Fund Subsidization," Journal of Finance, American Finance Association, vol. 61(1), pages 73-104, February.
    33. Jiaping Qiu, 2003. "Termination Risk, Multiple Managers and Mutual Fund Tournaments," Review of Finance, European Finance Association, vol. 7(2), pages 161-190.
    34. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. "Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
    35. Nishant Dass & Massimo Massa & Rajdeep Patgiri, 2008. "Mutual Funds and Bubbles: The Surprising Role of Contractual Incentives," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 51-99, January.
    36. Prem C. Jain & Joanna Shuang Wu, 2000. "Truth in Mutual Fund Advertising: Evidence on Future Performance and Fund Flows," Journal of Finance, American Finance Association, vol. 55(2), pages 937-958, April.
    37. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
    38. Cvitanic, Jaksa & Goukasian, Levon & Zapatero, Fernando, 2003. "Monte Carlo computation of optimal portfolios in complete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 27(6), pages 971-986, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Basak, Suleyman & Makarov, Dmitry, 2012. "Difference in interim performance and risk taking with short-sale constraints," Journal of Financial Economics, Elsevier, vol. 103(2), pages 377-392.
    2. Suleyman Basak & Dmitry Makarov, 2013. "Competition among Portfolio Managers and Asset Specialization," Working Papers w0194, New Economic School (NES).
    3. Castañeda, Pablo & Devoto, Benjamín, 2016. "On the structural estimation of an optimal portfolio rule," Finance Research Letters, Elsevier, vol. 16(C), pages 290-300.
    4. Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2011. "Risk Shifting and Mutual Fund Performance," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2575-2616.
    5. Kempf, Alexander & Ruenzi, Stefan & Thiele, Tanja, 2009. "Employment risk, compensation incentives, and managerial risk taking: Evidence from the mutual fund industry," Journal of Financial Economics, Elsevier, vol. 92(1), pages 92-108, April.
    6. Axel Stahmer, 2015. "Fund flows inducing mispricing of risk in competitive financial markets," ESMT Research Working Papers ESMT-15-04, ESMT European School of Management and Technology.
    7. Raphaëlle Bellando, 2008. "Le conflit d'agence dans la gestion déléguée de portefeuille : une revue de littérature," Revue d'économie politique, Dalloz, vol. 118(3), pages 317-339.
    8. Raphaëlle Bellando & Sébastien Ringuedé, 2007. "Compétition entre fonds et prise de risque excessive : une application empirique au cas des OPCVM actions de droit français," Post-Print halshs-00226341, HAL.
    9. Cuthbertson, Keith & Nitzsche, Dirk & O'Sullivan, Niall, 2016. "A review of behavioural and management effects in mutual fund performance," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 162-176.
    10. Gu Wang & Jiaxuan Ye, 2023. "Fund Managers’ Competition for Investment Flows Based on Relative Performance," Journal of Optimization Theory and Applications, Springer, vol. 198(2), pages 605-643, August.
    11. Raphaëlle BELLANDO & Sébastien RINGUEDE, 2009. "Compétition entre fonds et prise de risque excessive : une application empirique au cas français," LEO Working Papers / DR LEO 332, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    12. Clemens Sialm & T. Mandy Tham, 2016. "Spillover Effects in Mutual Fund Companies," Management Science, INFORMS, vol. 62(5), pages 1472-1486, May.
    13. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.
    14. Huang, Shiyang & Jiang, Ying & Qiu, Zhigang & Ye, Zhiqiang, 2019. "An equilibrium model of risk management spillover," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    15. Ha, Yeonjeong & Ko, Kwangsoo, 2017. "Why do fund managers increase risk?," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 108-116.
    16. Chia-Ying Chan & Christine W. Lai & Liang-Chung Lee, 2017. "Strategic Choice of Risk: Evidence from Mutual Fund Families," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(1), pages 125-163, February.
    17. Aleksandr G. Alekseev & Mikhail V. Sokolov, 2016. "Benchmark-based evaluation of portfolio performance: a characterization," Annals of Finance, Springer, vol. 12(3), pages 409-440, December.
    18. Servaes, Henri & Sigurdsson, Kari, 2022. "The Costs and Benefits of Performance Fees in Mutual Funds," Journal of Financial Intermediation, Elsevier, vol. 50(C).
    19. Yafeh, Yishay & Kandel, Eugene & Hamdani, Assaf & Mugerman, Yevgeny, 2015. "Incentive Fees and Competition in Pension Funds: Evidence from a Regulatory Experiment in Israel," CEPR Discussion Papers 10911, C.E.P.R. Discussion Papers.
    20. Kamma, Thijs & Pelsser, Antoon, 2022. "Near-optimal asset allocation in financial markets with trading constraints," European Journal of Operational Research, Elsevier, vol. 297(2), pages 766-781.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:69:y:2014:i:1:p:179-217. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/afaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.