TY  - JOUR
AU  - Gorton,Gary
AU  - He,Ping
AU  - Huang,Lixin
TI  - Asset Prices When Agents are Marked-to-Market
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12075
PY  - 2006
Y2  - March 2006
UR  - http://www.nber.org/papers/w12075
L1  - http://www.nber.org/papers/w12075.pdf
N1  - Author contact info:
Gary B. Gorton
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
Fax: 203/432-8931
E-Mail: Gary.Gorton@yale.edu

Ping He
Department of Finance, Tsinghua SEM
Weilun 308
Beijing 100084, China
Tel: 8610-62795754
Fax: 8610-62784554
E-Mail: heping@sem.tsinghua.edu.cn

Lixin Huang
J. Mack Robinson College of Business
Georgia State University
Atlanta, GA 30303
E-Mail: lxhuang@gsu.edu
AB  - "Risk management" in securities markets refers to the oversight of portfolio managers and professional traders when they trade on behalf of investors in security markets. Monitoring of their trading performance, profit and loss, and risk-taking behavior, is measured by principals using security market prices. We study the optimality of the practice of marking-to-market and provide conditions under which investing principals should optimally monitor their agent traders using market prices to measure traders' performance. Asset prices, however, can be affected by mark-to-market contracts. We show that such contracts introduce an externality when there are many traders. Traders may rationally herd, trading on irrelevant information. Ironically, this causes asset prices to be less informative than they would be without the mark-to-market feature.
ER  -