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Competition in Portfolio Management: Theory and Experiment

Asparouhova, Elena and Bossaerts, Peter and Čopič, Jernej and Cornell, Brad and Cvitanić, Jakša and Meloso, Debrah (2015) Competition in Portfolio Management: Theory and Experiment. Management Science, 61 (8). pp. 1868-1888. ISSN 0025-1909. doi:10.1287/mnsc.2014.1935.

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We explore theoretically and experimentally the general equilibrium price and allocation implications of delegated portfolio management when the investor–manager relationship is nonexclusive. Our theory predicts that competition forces managers to promise portfolios that mimic Arrow–Debreu (AD) securities, which investors then combine to fit their preferences. A weak version of the capital asset pricing model (CAPM) obtains, where state prices (relative to state probabilities) implicit in prices of traded securities will be inversely ranked to aggregate wealth across states. Our experiment broadly corroborates the price and choice predictions of the theory. However, price quality deteriorates when only a few managers attract most of the available wealth. Wealth concentration increases because funds flow toward managers who offer portfolios closer to replicating AD securities (as in the theory), but also because funds flow to managers who had better performance in the immediate past (an observation unrelated to the theory).

Item Type:Article
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URLURL TypeDescription
Bossaerts, Peter0000-0003-2308-2603
Cvitanić, Jakša0000-0001-6651-3552
Additional Information:© 2015 INFORMS. This work is licensed under a Creative Commons Attribution 4.0 International License. You are free to copy, distribute, transmit and adapt this work, but you must attribute this work as “Management Science. Copyright 2015 INFORMS., used under a Creative Commons Attribution License:” Received July 5, 2012; accepted September 27, 2013, by Jerome Detemple, finance. Published online in Articles in Advance July 25, 2014. The authors thank Ron Kaniel, Sebastien Pouget, Neil Stoughton, and anonymous referees, as well as seminar audiences at the Hong Kong University of Science and Technology, the University of Granada, the Experimental Finance Conference at the University of Innsbruck, the Western Conference on Mathematical Finance at the University of Southern California, the Center for Studies in Economics and Finance–Innocenzo Gasparini Institute for Economic Research Symposium on Economics and Institutions at Capri, EDHEC Business School, the University of Zurich Department of Finance, the International French Finance Association Conference (Lyon 2013), the Gerzensee Asset Pricing Symposium, and the Luxembourg School of Finance for useful comments. The authors also thank Tihomir Asparouhov for his help programming. Financial support from the National Science Foundation [Grants SES-0616431 and DMS 10-08219], the European Research Council [Advanced Grant BRSCDP-TEA], the Hacker Chair at the California Institute of Technology (Caltech), and the Development Fund of the David Eccles School of Business at the University of Utah is gratefully acknowledged.
Funding AgencyGrant Number
NSFDMS 10-08219
European Research Council (ERC)UNSPECIFIED
University of UtahUNSPECIFIED
Subject Keywords:delegated portfolio management; asset pricing theory; experimental finance
Issue or Number:8
Record Number:CaltechAUTHORS:20150828-090251047
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Official Citation:Competition in Portfolio Management: Theory and Experiment Elena Asparouhova, Peter Bossaerts, Jernej Čopič, Brad Cornell, Jakša Cvitanić, and Debrah Meloso Management Science 201561:8 , 1868-1888
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:59944
Deposited By: Tony Diaz
Deposited On:11 Sep 2015 19:47
Last Modified:10 Nov 2021 22:27

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