Strategic Asset Allocation In Money Management

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Executive Summary

This paper analyzes the dynamic portfolio choice implications of strategic interaction among money managers. The strategic interaction emerges as the managers compete for money flows displaying empirically documented convexities. A manager gets money flows increasing with performance, and hence displays relative performance concerns, if her relative return is above a threshold; otherwise she receives no (or constant) flows and has no relative concerns. The authors provide a tractable formulation of such strategic interaction between two risk averse managers in a continuous-time setting, and solve for their equilibrium policies in closed-form.

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