Work

Optimal Asset Allocation and Risk Shifting in Money Management

Year: 2007

Type: article

Abstract: This article investigates a fund manager's risk-taking incentives induced by an increasing and convex relationship of fund flows to relative performance. In a dynamic portfolio choice framework, we show that the ensuing convexities in the manager's objective give rise to a finite risk-shifting range over which she gambles to finish ahead of her benchmark. Such gambling entails either an increase or a decrease in the volatility of the manager's portfolio, depending on her risk tolerance. In the latter case, the manager reduces her holdings of the risky asset despite its positive risk premium. Our empirical analysis lends support to the novel predictions of the model.

Source: Review of Financial Studies

DOI: 10.1093/rfs/hhm026

Authors: Suleyman Basak, Anna Pavlova, Alexander Shapiro

Institutions: Centre for Economic Policy Research, London Business School, New York University

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3124036982

FWCI: 28.39

Cites: 50

Cited by: 292

Related to: 10