Rewarding Trading Skills without Inducing Gambling

Makarov, Igor and Plantin, Guillaume (2015) Rewarding Trading Skills without Inducing Gambling. Journal of Finance, vol. 70 (n°3). pp. 952-962.

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Official URL: http://tse-fr.eu/pub/28366

Abstract

This paper develops a model of active asset management in which fund managers may forego alpha-generating strategies, preferring instead to make negative-alpha trades that enable them temporarily to manipulate investors' perceptions of their skills. We show that such trades are optimally generated by taking on hidden-tail risk, and that they are more likely to occur when fund managers are impatient, and when their trading skills are scalable and generate a high profit per unit of risk. We propose long-term contracts that deter this behavior by dynamically adjusting the dates on which the manager is compensated in response to her cumulative performance.

Item Type: Article
Language: English
Date: June 2015
Refereed: Yes
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 16 Mar 2015 14:49
Last Modified: 09 Apr 2018 11:49
OAI ID: oai:tse-fr.eu:28366
URI: http://publications.ut-capitole.fr/id/eprint/16542

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