DP4034 Trading Volume with Career Concerns

Author(s): Amil Dasgupta, Andrea Prat
Publication Date: September 2003
Keyword(s): career concerns, churning, delegated portfolio management
JEL(s): D82
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4034

This Paper shows that trade can occur in a market where all traders are rational and none of them is subject to exogenous shocks. We develop a model of delegated portfolio management that captures key features of the US mutual fund industry and we embed it into an asset-pricing set-up. Fund managers differ in their ability to understand market fundamentals. In equilibrium, the presence of career concerns induces uninformed fund managers to ‘churn’, i.e. to engage in trading even when they face a negative expected return. As churning plays the role of noise trading, the asset market displays non-fully informative prices and positive (and high) trading volume.