Rewarding Trading Skills Without Inducing Gambling
Identifieur interne : 000138 ( France/Analysis ); précédent : 000137; suivant : 000139Rewarding Trading Skills Without Inducing Gambling
Auteurs : Igor Makarov [États-Unis] ; Guillaume Plantin [France]Source :
- Journal of Finance, The (AFA) [ 00221082 ] ; 2015-06.
English descriptors
Abstract
This paper develops a model of active asset management in which fund managers may forgo alpha-generating strategies, preferring instead to make negative-alpha trades that enable them to temporarily manipulate investors' perceptions of their skills. We show that such trades are optimally generated by taking on hidden tail risk, and are more likely to occur when fund managers are impatient and when their trading skills are scalable, and generate a high profit per unit of risk. We propose long-term contracts that deter this behavior by dynamically adjusting the dates on which the manager is compensated in response to her cumulative performance.
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Affiliations:
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- to stream Hal, to step Checkpoint: 000158
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Hal:hal-01178107Le document en format XML
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<front><div type="abstract" xml:lang="en">This paper develops a model of active asset management in which fund managers may forgo alpha-generating strategies, preferring instead to make negative-alpha trades that enable them to temporarily manipulate investors' perceptions of their skills. We show that such trades are optimally generated by taking on hidden tail risk, and are more likely to occur when fund managers are impatient and when their trading skills are scalable, and generate a high profit per unit of risk. We propose long-term contracts that deter this behavior by dynamically adjusting the dates on which the manager is compensated in response to her cumulative performance.</div>
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