Working Paper: NBER ID: w26027
Authors: Robert F. Stambaugh
Abstract: I analyze skill’s role in active management under general equilibrium with many assets and costly trading. More-skilled managers produce larger expected total investment profits, and their portfolio weights correlate more highly with assets’ future returns. Becoming more skilled, however, can reduce a manager’s expected profit if enough other managers also become more skilled. The greater skill allows those managers to identify profit opportunities more accurately, but active management in aggregate then corrects prices more, shrinking the profits those opportunities offer. The latter effect can dominate in a setting consistent with numerous empirical properties of active management and stock returns.
Keywords: No keywords provided
JEL Codes: G12; G14; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| more skilled managers (J24) | larger expected total investment profits (G31) |
| increased number of skilled managers (J24) | lower expected profits (D22) |
| more skilled managers (J24) | increased aggregate demand for stocks (E22) |
| increased aggregate demand for stocks (E22) | raised prices (P22) |
| raised prices (P22) | lower expected profits for all managers (D22) |
| if 25% or 50% of managers become skilled (J24) | greater expected profits (L21) |
| if 90% of managers become skilled (J24) | lower expected profits (D22) |