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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. Working Paper. Birkbeck, University of London, London, UK.

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Abstract

We analyse the equilibrium consequences of performance-based contracts for fund managers. Managerial remuneration is tied to a fund’s absolute performance and its performance relative to rival funds. Investors choose whether or not to delegate their investment to better-informed fund managers; if they delegate they choose the parameters of 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.

Metadata

Item Type: Monograph (Working Paper)
Additional Information: BWPEF 0503
Keyword(s) / Subject(s): portfolio delegation, relative performance evaluation, equity premium
School: Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School
Research Centres and Institutes: Innovation Management Research, Birkbeck Centre for
Depositing User: Administrator
Date Deposited: 05 Apr 2019 08:44
Last Modified: 19 Jul 2025 07:37
URI: https://eprints.bbk.ac.uk/id/eprint/27051

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