Riding the Bubble with Convex Incentives

• 成果类型: Article
• 署名作者: Sotes-Paladino, Juan; Zapatero, Fernando
• 署名单位: University of Melbourne; University of Southern California
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhy074
• 发表日期: 2019
• 页码: 1416
• 关键词: asset prices; Mutual funds; risk-taking; performance; arbitrage; investors; money

摘要

We show that benchmark-linked convex incentives can lead risk-averse money managers aware of mispricing to overinvest 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 overinvestment in overvalued nonbenchmark securities. In contrast, they potentially offset the benchmarking effects studied in the literature, leading to underinvestment in overpriced benchmark securities. Under correlated mispricing across assets, our model rationalizes positive positions in nonbenchmark, negative risk premium (i.e., bubble) securities and pairs trading in two overvalued securities. Our findings help explain several empirical puzzles.