A Delegated Agent Asset-Pricing Model PDF Download
Are you looking for read ebook online? Search for your book and save it on your Kindle device, PC, phones or tablets. Download A Delegated Agent Asset-Pricing Model PDF full book. Access full book title A Delegated Agent Asset-Pricing Model by Bradford Cornell. Download full books in PDF and EPUB format.
Author: Bradford Cornell Publisher: ISBN: Category : Languages : en Pages : 29
Book Description
Asset pricing theory has traditionally made predictions about risk and return but has been silent on the actual process of investment. Many, if not most investors, delegate major investment decisions to professionals, to investment managers and financial advisors. This suggests that the instructions given by investors to their delegated agents and the compensation of those agents might be important determinants of capital market equilibrium. In the extreme when all investment decisions are delegated, the preferences and beliefs of individuals would be completely superseded by the objective functions of agent/managers. Agency theory holds that such objective functions cannot be isomorphic to principals' preferences and beliefs, which suggests that asset pricing could differ fundamentally from that predicted by existing theory. A provocative illustration of the difference is provided in this paper based on active asset management relative to a benchmark index, a common objective function in practice but with no grounding in traditional theory. With the growing preponderance of delegated investing, future asset pricing theory will not only have to describe risk and return but, to be complete, must also be able to explain the observed objective functions used by professional managers.
Author: Bradford Cornell Publisher: ISBN: Category : Languages : en Pages : 29
Book Description
Asset pricing theory has traditionally made predictions about risk and return but has been silent on the actual process of investment. Many, if not most investors, delegate major investment decisions to professionals, to investment managers and financial advisors. This suggests that the instructions given by investors to their delegated agents and the compensation of those agents might be important determinants of capital market equilibrium. In the extreme when all investment decisions are delegated, the preferences and beliefs of individuals would be completely superseded by the objective functions of agent/managers. Agency theory holds that such objective functions cannot be isomorphic to principals' preferences and beliefs, which suggests that asset pricing could differ fundamentally from that predicted by existing theory. A provocative illustration of the difference is provided in this paper based on active asset management relative to a benchmark index, a common objective function in practice but with no grounding in traditional theory. With the growing preponderance of delegated investing, future asset pricing theory will not only have to describe risk and return but, to be complete, must also be able to explain the observed objective functions used by professional managers.
Author: Arun Muralidhar Publisher: ISBN: Category : Languages : en Pages : 15
Book Description
This paper makes a simple but bold argument that because mean-variance optimization (MVO) and the capital asset pricing model (CAPM) were derived from a theoretical construct rather than reality, they represent a specialized case of a more general theory. We suggest a theory based on the liability to be serviced by an investment portfolio that is managed by a delegated decision maker. From this perspective, all decisions are relative; hence we present a relative asset pricing model (RAPM) as the true starting point for asset pricing theory. RAPM accommodates the fact that real investors are concerned about the relative return of their portfolios (relative mean) and the relative risk of their portfolios (composed of two independent variables -- relative variance and correlation). Moreover, investors are concerned about their agents' skill to generate alpha. Turning off these features gives us CAPM; hence our claim that CAPM is a stylized model of a more general theory. Because current theory was derived from the assumptions that investors are concerned about their absolute wealth and that they know the return distribution, which is characterized by mean and variance, it misses an important part of real-life decision making. When investors are concerned about the relative return of their portfolios and do not know the return distribution that is generated by their agents, correlation matters in addition to mean and variance. Therefore investment decision making will occur in three-dimensional space rather than the meanvariance two-dimensional plane. A decision maker forced to choose only two of three or more independent variables would get a limited result. This is exactly what happens with investment theory. This paper provides the foundation for adding a correlation dimension. We hope that other talented academics will help develop RAPM, which will provide better recommendations for asset pricing, asset allocation, rebalancing, risk-adjusted performance calculations, and manager compensation.
Author: Shiyang Huang Publisher: ISBN: Category : Languages : en Pages : 60
Book Description
This paper studies the joint determination of optimal contracts and equilibrium asset prices in an economy with multiple principal-agent pairs. Principals design optimal contracts that provide incentives for agents to acquire costly information. With agency problems, the agents' compensation depends on the accuracy of their forecasts for asset prices and payoffs. Complementarities in information acquisition delegation arise as follows. As more principals hire agents to acquire information, asset prices become less noisy. Consequently, agents are more willing to acquire information because they can forecast asset prices more accurately, thus mitigating agency problems and encouraging other principals to hire agents. This mechanism can explain many interesting phenomena in markets, including multiple equilibria, herding, home bias and idiosyncratic volatility comovement.
Author: Navneet Arora Publisher: ISBN: Category : Languages : en Pages : 61
Book Description
Previous analysis of equilibrium asset prices often ignore the effects of delegated portfolio management and those of delegated portfolio management problems often ignore information and equilibrium asset prices. This paper develops a dynamic model that simultaneously considers optimal contracting and equilibrium asset prices under differential information. We consider a case in which investors can contract on various signals as well as a case in which investors constrain the contract form to be of a linear function of the terminal value of their portfolios. Optimal contracts and equilibrium asset prices are characterized in both cases. We examine the impact of portfolio delegation and risk sharing on portfolio managers' trading behavior, the autocorrelation in stock returns, and the persistence of fund performance. We find that due to the less optimal risk sharing contract, the risk premium on the stock as well as the autocorrelations in both stock and fund returns are substantially higher in case 1 than in case 2. In particular, we find that under certain conditions, the autocorrelations in fund returns are positive, suggesting the persistence of fund performance. The presence of differential information among funds reduces autocorrelations in stock and fund returns, but the costs associated with managing the portfolio enhance them.
Author: B.Philipp Kellerhals Publisher: Springer Science & Business Media ISBN: 3540246975 Category : Business & Economics Languages : en Pages : 247
Book Description
Covers applications to risky assets traded on the markets for funds, fixed-income products and electricity derivatives. Integrates the latest research and includes a new chapter on financial modeling.
Author: Markus Leippold Publisher: ISBN: Category : Languages : en Pages : 50
Book Description
Despite the enormous growth of the asset management industry during the past decades, little is known about the asset pricing implications of investment intermediaries. Standard models of investment theory do not address the distinction between individual and institutional investors nor the potential implications of direct investing and delegated investing. In a model with endogenous delegation, we find that delegation leads to a more informative price system and lower equity premia. In the presence of relative return objectives, stocks exhibiting high correlations with the benchmark have significantly lower returns than stocks with low correlations. Our empirical results support the model's predictions.
Author: Bradford Cornell
Author: Bradford Cornell
Author: Arun Muralidhar
Author: Shiyang Huang
Author: Navneet Arora
Author: Philippe Rohner
Author: 
Author: Tae-Jin Kang
Author: B.Philipp Kellerhals
Author: Markus Leippold
Author: Diana R. Harrington