Working Paper: CEPR ID: DP4034
Authors: Amil Dasgupta; Andrea Prat
Abstract: This Paper shows that trade can occur in a market where all traders are rational and none of them is subject to exogenous shocks. We develop a model of delegated portfolio management that captures key features of the US mutual fund industry and we embed it into an asset-pricing set-up. Fund managers differ in their ability to understand market fundamentals. In equilibrium, the presence of career concerns induces uninformed fund managers to ?churn?, i.e. to engage in trading even when they face a negative expected return. As churning plays the role of noise trading, the asset market displays non-fully informative prices and positive (and high) trading volume.
Keywords: career concerns; churning; delegated portfolio management
JEL Codes: D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Career concerns (J62) | Trading volume (G15) |
| No career concerns (J62) | No trading (Y70) |
| Career concerns (J62) | Churning (trading) (E32) |
| Churning equilibrium (D59) | High trading volume (G15) |
| Long-term contracts (L14) | Diminished career concerns (J62) |
| Diminished career concerns (J62) | Zero trading volume (G19) |