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Asset Management as Creator of Market Inefficiency

Author

Listed:
  • Dimitri Vayanos

    (London School of Economics, , CEPR and NBER)

  • Paul Woolley

    (London School of Economics)

Abstract

In this paper, we describe how agency frictions in asset management can generate prime violations of the Efficient Markets Hypothesis, such as momentum, value and an inverted risk-return relationship. Momentum in our theory is associated with procyclical fund flows and price over-reaction, and is more pronounced for overvalued assets. The investors who generate the momentum and who are losing from it are those requiring their asset managers to keep their portfolios close to benchmark indices. Our theory suggests a rethinking of asset management contracts. Contracts should employ measures of long-run risk and return, and benchmark indices that emphasize asset fundamentals. There should also be greater transparency on managers’ choice of strategies.

Suggested Citation

  • Dimitri Vayanos & Paul Woolley, 2023. "Asset Management as Creator of Market Inefficiency," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 51(1), pages 1-11, March.
    • Handle: RePEc:kap:atlecj:v:51:y:2023:i:1:d:10.1007_s11293-023-09769-6
    DOI: 10.1007/s11293-023-09769-6
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    References listed on IDEAS

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    More about this item

    Keywords

    G12; G14; G23; E44;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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