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Competition in Portfolio Management: Theory and Experiment

Author

Listed:
  • Elena Asparouhova

    (David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112)

  • Peter Bossaerts

    (David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112)

  • Jernej Čopič

    (Department of Economics, University of California, Los Angeles, Los Angeles, California 90095)

  • Brad Cornell

    (Humanities and Social Sciences, California Institute of Technology, Pasadena, California 91125)

  • Jakša Cvitanić

    (Humanities and Social Sciences, California Institute of Technology, Pasadena, California 91125)

  • Debrah Meloso

    (Department of Decision Sciences, Bocconi University, 20136 Milan, Italy)

Abstract

We explore theoretically and experimentally the general equilibrium price and allocation implications of delegated portfolio management when the investor--manager relationship is nonexclusive. Our theory predicts that competition forces managers to promise portfolios that mimic Arrow--Debreu (AD) securities, which investors then combine to fit their preferences. A weak version of the capital asset pricing model (CAPM) obtains, where state prices (relative to state probabilities) implicit in prices of traded securities will be inversely ranked to aggregate wealth across states. Our experiment broadly corroborates the price and choice predictions of the theory. However, price quality deteriorates when only a few managers attract most of the available wealth. Wealth concentration increases because funds flow toward managers who offer portfolios closer to replicating AD securities (as in the theory), but also because funds flow to managers who had better performance in the immediate past (an observation unrelated to the theory). This paper was accepted by Jerome Detemple, finance.

Suggested Citation

  • Elena Asparouhova & Peter Bossaerts & Jernej Čopič & Brad Cornell & Jakša Cvitanić & Debrah Meloso, 2015. "Competition in Portfolio Management: Theory and Experiment," Management Science, INFORMS, vol. 61(8), pages 1868-1888, August.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:8:p:1868-1888
    DOI: 10.1287/mnsc.2014.1935
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    References listed on IDEAS

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    Cited by:

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    2. Kopányi, Dávid & Rabanal, Jean Paul & Rud, Olga A. & Tuinstra, Jan, 2019. "Can competition between forecasters stabilize asset prices in learning to forecast experiments?," Journal of Economic Dynamics and Control, Elsevier, vol. 109(C).
    3. Robert M. Gillenkirch & Louis Velthuis, 2023. "Delegated risk-taking, accountability, and outcome bias," Journal of Risk and Uncertainty, Springer, vol. 67(2), pages 137-161, October.
    4. Anufriev, Mikhail & Bao, Te & Sutan, Angela & Tuinstra, Jan, 2019. "Fee structure and mutual fund choice: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 158(C), pages 449-474.
    5. Marina Agranov & Alberto Bisin & Andrew Schotter, 2014. "An experimental study of the impact of competition for Other People’s Money: the portfolio manager market," Experimental Economics, Springer;Economic Science Association, vol. 17(4), pages 564-585, December.

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