publication . Article . Preprint . 2009

Delegated Portfolio Management and Risk Taking Behavior

Jose L. B. Fernandes; Juan Ignacio Peña; Benjamin Miranda Tabak;
Open Access
  • Published: 01 Dec 2009 Journal: SSRN Electronic Journal (eissn: 1556-5068, Copyright policy)
  • Publisher: Elsevier BV
Abstract
Standard models of moral hazard predict a negative relationship between risk and incentives; however, empirical studies on mutual funds present mixed results. In this article, we propose a behavioral principal-agent model in the context of professional managers, focusing on active and passive investment strategies. Using this general framework, we evaluate how incentives affect the risk-taking behavior of managers, considering the standard moral hazard model as a special case, and solve the previous contradiction. Empirical evidence, based on a comprehensive world sample of 4584 mutual funds, gives support to our theoretical model.
Subjects
free text keywords: Actuarial science, Empirical evidence, Prospect theory, Empirical research, Moral hazard, Negative relationship, Passive management, Project portfolio management, Incentive, Economics
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