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  3. American Economic Review
  4. August 2012
  5. Fund Managers, Career Concerns, and Asset Price Volatility

Fund Managers, Career Concerns, and Asset Price Volatility

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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 default risk. Based on past performance, investors update beliefs on managers and make firing decisions. This leads to career concerns that affect managers' investment decisions, generating a countercyclical "reputational premium." When default risk is high, return on bonds 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. (JEL G11, G12, G23, L84)

Citation

Guerrieri, Veronica, and Péter Kondor. 2012. "Fund Managers, Career Concerns, and Asset Price Volatility." American Economic Review, 102 (5): 1986-2017. DOI: 10.1257/aer.102.5.1986

Additional Materials

JEL Classification

  • G11 Portfolio Choice; Investment Decisions
  • G12 Asset Pricing; Trading volume; Bond Interest Rates
  • G23 Pension Funds; Other Private Financial Institutions; Institutional Investors
  • L84 Personal, Professional, and Business Services