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- Title
Asset Management as Creator of Market Inefficiency.
- Authors
Vayanos, Dimitri; Woolley, Paul
- Abstract
In this paper, we describe how agency frictions in asset management can generate prime violations of the Efficient Markets Hypothesis, such as momentum, value and an inverted risk-return relationship. Momentum in our theory is associated with procyclical fund flows and price over-reaction, and is more pronounced for overvalued assets. The investors who generate the momentum and who are losing from it are those requiring their asset managers to keep their portfolios close to benchmark indices. Our theory suggests a rethinking of asset management contracts. Contracts should employ measures of long-run risk and return, and benchmark indices that emphasize asset fundamentals. There should also be greater transparency on managers' choice of strategies.
- Subjects
ASSET management; EFFICIENT market theory; MARKETING management; INVESTORS; MANAGEMENT contracts; RISK-return relationships
- Publication
Atlantic Economic Journal, 2023, Vol 51, Issue 1, p1
- ISSN
0197-4254
- Publication type
Article
- DOI
10.1007/s11293-023-09769-6