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Competition in Portfolio Management: Theory and Experiment

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  • Elena Asparouhova
  • Peter Bossaerts
  • Jernej Copic
  • Brad Cornell
  • Jaksa Cvitanic
  • Debrah Meloso

Abstract

We develop a new theory of delegated investment whereby managers compete in terms of composition of the portfolios they promise to acquire. We study the resulting asset pricing in the inter-manager market. We incentivize investors so that we obtain sharp predictions. Managers are paid a fixed fraction of fund size. In equilibrium, investors choose managers who offer portfolios that mimic Arrow-Debreu (state) securities. Prices in the inter-manager market are predicted to satisfy a weak version of the CAPM: state-price probability ratios implicit in prices of traded assets decrease in aggregate wealth across states. An experiment involving about one hundred participants over six weeks broadly supports the theoretical predictions. Pricing quality declines, however, when fund concentration increases because funds flow towards managers who offer portfolios closer to Arrow-Debreu securities (as in the theory) and who had better recent performance (an observation unrelated to the theory).

Suggested Citation

  • Elena Asparouhova & Peter Bossaerts & Jernej Copic & Brad Cornell & Jaksa Cvitanic & Debrah Meloso, 2012. "Competition in Portfolio Management: Theory and Experiment," Working Papers 438, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Handle: RePEc:igi:igierp:438
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    References listed on IDEAS

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    Cited by:

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    2. 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.
    3. 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.
    4. 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).
    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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