Erschienen in:Marshall School of Business Working Paper ; No. FBE 06.14
Umfang:
1 Online-Ressource (53 p)
Sprache:
Englisch
DOI:
10.2139/ssrn.2471082
Identifikator:
Entstehung:
Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments February 23, 2018 erstellt
Beschreibung:
We show that benchmark-linked convex incentives can lead risk-averse money managers aware of mispricing to over-invest in overpriced securities. In the model, the managers' risk-seeking behavior varies in response to the interaction of mispricing with convexity and benchmarking concerns. Convexity effects can exacerbate the manager's over-investment in overvalued non-benchmark securities. In contrast, they potentially offset benchmarking effects studied in the literature, leading to under-investment in overpriced benchmark securities. Under correlated mispricing across assets, our model rationalizes positive positions in non-benchmark, negative-risk premium (i.e., "bubble") securities and "pairs trading" in two overvalued securities. Our findings help explain several empirical puzzles