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Fund Managers, Career Concerns, and Asset Price Volatility

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  • Kondor, Péter
  • Guerrieri, Veronica

Abstract

We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on the default risk. Looking at the past performance, investors update beliefs on their managers and make firing decisions. This leads to career concerns which a¤ect investment decisions, generating a counter-cyclical 'reputational premium.' When default risk is high, the bond?s return is high to compensate uninformed managers for the high risk of being fired. As default risk changes over time, the reputational premium amplifies price volatility.

Suggested Citation

  • Kondor, Péter & Guerrieri, Veronica, 2011. "Fund Managers, Career Concerns, and Asset Price Volatility," CEPR Discussion Papers 8454, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8454
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    More about this item

    Keywords

    Amplification; Career concerns; Delegated portfolio management;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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