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A Model of Portfolio Delegation and Strategic Trading

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  • Albert S. Kyle
  • Hui Ou-Yang
  • Bin Wei

Abstract

This article endogenizes information acquisition and portfolio delegation in a one-period strategic trading model. We find that, when the informed portfolio manager is relatively risk tolerant (averse), price informativeness increases (decreases) with the amount of noise trading. When noise trading is endogenized, the linear equilibrium in the traditional literature breaks down under a wide range of parameter values. In contrast, a linear equilibrium always exists in our model. In a conventional portfolio delegation model under a competitive partial equilibrium, the manager's effort of acquiring information is independent of a linear incentive contract. In our strategic trading model, however, a higher-powered linear contract induces the manager to exert more effort for information acquisition. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Albert S. Kyle & Hui Ou-Yang & Bin Wei, 2011. "A Model of Portfolio Delegation and Strategic Trading," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3778-3812.
    • Handle: RePEc:oup:rfinst:v:24:y::i:11:p:3778-3812
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    File URL: http://hdl.handle.net/10.1093/rfs/hhr054
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    Citations

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    Cited by:

    1. Bade, Marco & Hirth, Hans, 2016. "Liquidity cost vs. real investment efficiency," Journal of Financial Markets, Elsevier, vol. 28(C), pages 70-90.
    2. Sheng, Jiliang & Wang, Jian & Wang, Xiaoting & Yang, Jun, 2014. "Asymmetric contracts, cash flows and risk taking of mutual funds," Economic Modelling, Elsevier, vol. 38(C), pages 435-442.
    3. Guido Maretto, 2017. "Diversification and screening," Nova SBE Working Paper Series wp610, Universidade Nova de Lisboa, Nova School of Business and Economics.
    4. Savitar Sundaresan & Jaromir Nosal & Marcin Kacperczyk, 2017. "Market Power and Informational Efficiency," 2017 Meeting Papers 356, Society for Economic Dynamics.
    5. Yutong Lu & Gesine Reinert & Mihai Cucuringu, 2022. "Trade Co-occurrence, Trade Flow Decomposition, and Conditional Order Imbalance in Equity Markets," Papers 2209.10334, arXiv.org, revised Mar 2024.
    6. Piccotti, Louis R., 2020. "Strategic trade when securitized portfolio values are unknown," Journal of Banking & Finance, Elsevier, vol. 115(C).
    7. Guo, Rui & Jiang, Ying & Li, Ao & Qiu, Zhigang & Wang, Hefei, 2021. "A model of delegation with a VaR constraint," Finance Research Letters, Elsevier, vol. 42(C).
    8. Wassim Daher & Harun Aydilek & Elias G. Saleeby, 2020. "Insider trading with different risk attitudes," Journal of Economics, Springer, vol. 131(2), pages 123-147, October.
    9. Huang, Shiyang & Qiu, Zhigang & Yang, Liyan, 2020. "Institutionalization, delegation, and asset prices," Journal of Economic Theory, Elsevier, vol. 186(C).
    10. Sheng, Jiliang & Wang, Xiaoting & Yang, Jun, 2012. "Incentive contracts in delegated portfolio management under VaR constraint," Economic Modelling, Elsevier, vol. 29(5), pages 1679-1685.
    11. Wang, Jian & Sheng, Jiliang & Yang, Jun, 2013. "Optimism bias and incentive contracts in portfolio delegation," Economic Modelling, Elsevier, vol. 33(C), pages 493-499.
    12. Taylor, Daniel J. & Verrecchia, Robert E., 2015. "Delegated trade and the pricing of public and private information," Journal of Accounting and Economics, Elsevier, vol. 60(2), pages 8-32.
    13. Moreno, David & Rodríguez, Rosa & Zambrana, Rafael, 2018. "Management sub-advising in the mutual fund industry," Journal of Financial Economics, Elsevier, vol. 127(3), pages 567-587.
    14. Akihiko Ikeda & Hiroshi Osano, 2020. "Information Investment Regulation and Portfolio Delegation," KIER Working Papers 1032, Kyoto University, Institute of Economic Research.
    15. Han, Min-Yeon & Jun, Sang-Gyung & Oh, Ji Yeol Jimmy & Kang, Hyoung-Goo, 2023. "Who should choose the money managers? Institutional sponsors' equity manager performance," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    16. Jiliang Sheng & Yanyan Yang & Xiaoting Wang & Jun Yang, 2024. "How nonlinear benchmark in delegation contract can affect asset price and price informativeness," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 78(4), pages 1117-1168, December.

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