Citation

Discussion Paper Details

Please find the details for DP4038 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Relative Performance Evaluation Contracts and Asset Market Equilibrium

Author(s): Sandeep Kapur and Allan Timmermann

Publication Date: September 2003

Keyword(s): equity premium, portfolio delegation and relative performance evaluation

Programme Area(s): Financial Economics

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 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 performance evaluation may lower the equity premium.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4038

Bibliographic Reference

Kapur, S and Timmermann, A. 2003. 'Relative Performance Evaluation Contracts and Asset Market Equilibrium'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4038