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Relative performance evaluation contracts and asset market equilibrium

Kapur, Sandeep and Timmermann, A. (2005) Relative performance evaluation contracts and asset market equilibrium. The Economic Journal 115 (506), pp. 1077-1102. ISSN 0013-0133.

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Official URL: http://dx.doi.org/10.1111/j.1468-0297.2005.01033.x

Abstract

We analyse the equilibrium consequences of performance-based contracts for fund managers. Managerial remuneration is tied to a fund's absolute and relative performance. Investors choose whether or not to delegate their investment to better-informed fund managers; if they delegate they choose the optimal contract subject to the fund manager's participation constraint. We find that the impact of relative performance evaluation on the equilibrium equity premium and on portfolio herding critically depends on whether the participation constraint is binding. Simple numerical examples suggest that the increased importance of delegation and relative performance evaluation may lower the equity premium.

Item Type: Article
Keyword(s) / Subject(s): portfolio delegation, relative performance evaluation, equity premium
School or Research Centre: Birkbeck Schools and Research Centres > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
Depositing User: Sandra Plummer
Date Deposited: 17 Jan 2006
Last Modified: 17 Apr 2013 12:32
URI: http://eprints.bbk.ac.uk/id/eprint/296

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