Competition in Portfolio Management: Theory and Experiment
Elena Asparouhova, Peter Bossaerts, Jernej Copic, Brad Cornell, Jaksa Cvitanic, Debrah Meloso
Management Science | INFORMS | Published : 2015
We explore theoretically and experimentally the general equilibrium price and allocation implications of delegated portfolio management when the investor-manager relationship is nonexclusive. Our theory predicts that competition forces managers to promise portfolios that mimic Arrow-Debreu (AD) securities, which investors then combine to fit their preferences. A weak version of the capital asset pricing model (CAPM) obtains, where state prices (relative to state probabilities) implicit in prices of traded securities will be inversely ranked to aggregate wealth across states. Our experiment broadly corroborates the price and choice predictions of the theory. However, price quality deteriorate..View full abstract
Awarded by National Science Foundation
The authors thank Ron Kaniel, Sebastien Pouget, Neil Stoughton, and anonymous referees, as well as seminar audiences at the Hong Kong University of Science and Technology, the University of Granada, the Experimental Finance Conference at the University of Innsbruck, the Western Conference on Mathematical Finance at the University of Southern California, the Center for Studies in Economics and Finance-Innocenzo Gasparini Institute for Economic Research Symposium on Economics and Institutions at Capri, EDHEC Business School, the University of Zurich Department of Finance, the International French Finance Association Conference (Lyon 2013), the Gerzensee Asset Pricing Symposium, and the Luxembourg School of Finance for useful comments. The authors also thank Tihomir Asparouhov for his help programming. Financial support from the National Science Foundation [Grants SES-0616431 and DMS 10-08219], the European Research Council [Advanced Grant BRSCDP-TEA], the Hacker Chair at the California Institute of Technology (Caltech), and the Development Fund of the David Eccles School of Business at the University of Utah is gratefully acknowledged.