Financial Markets Group
London School of Economics
London WC2A 2AE
Institutional Affiliation: London School of Economics
NBER Working Papers and Publications
|September 2014||Asset Management Contracts and Equilibrium Prices|
with Andrea M. Buffa, Dimitri Vayanos: w20480
We study how the agency relationship between investors and asset managers affects equilibrium prices. We begin with a static contracting model, in which the optimal contract bounds managers’ portfolio risk regardless of their private information. We embed that model into an equilibrium asset-pricing model with noise traders and overlapping generations of investors and managers. Risk limits generate an inverted risk-return relationship: overvalued assets have high volatility because managers buy them during bull markets to meet risk limits. Because overvalued assets have higher share price and volatility, risk limits are more constraining when trading against overvaluation, biasing the aggregate market upward.
|December 2008||An Institutional Theory of Momentum and Reversal|
with Dimitri Vayanos: w14523
We propose a rational theory of momentum and reversal based on delegated portfolio management. An investor can hold assets through an index or an active fund. Investing in the active fund involves a time-varying cost, interpreted as managerial perk or ability. The investor responds to an increase in the cost by flowing out of the active and into the index fund. While prices of assets held by the active fund drop in anticipation of these outflows, the drop is expected to continue, leading to momentum. Because outflows push prices below fundamental values, expected returns eventually rise, leading to reversal. Besides momentum and reversal, fund flows generate comovement, lead-lag effects and amplification, with all effects being larger for assets with high idiosyncratic risk. The active-fun...
Published: Dimitri Vayanos & Paul Woolley, 2013. "An Institutional Theory of Momentum and Reversal," Review of Financial Studies, Society for Financial Studies, vol. 26(5), pages 1087-1145. citation courtesy of