Basak is with London Business School and Makarov is with New Economic School. We are grateful to Cam Harvey (the Editor), an anonymous referee, and an anonymous Associate Editor for valuable suggestions. We also thank Tomas Bjork, Sergei Izmalkov, Vitaly Kazakov, Anthony Neuberger, Anna Pavlova, Guilllaume Plantin, Larry Samuelson, and seminar participants at Carnegie Mellon, Cass, Erasmus, Geneva, Lausanne, LBS, LSE, Lugano, Louvain, NES, NHH, Piraeus, Sabanci, Stockholm, Tilburg, Toronto, and Asset Management Forum, Campus for Finance, European Finance Association, Frontiers of Finance and Western Finance Association meetings for helpful comments. An earlier version of this work was circulated in the manuscript entitled “Strategic Asset Allocation with Relative Performance Concerns.” All errors are our responsibility.
Strategic Asset Allocation in Money Management
Article first published online: 7 JAN 2014
© 2013 the American Finance Association
The Journal of Finance
Volume 69, Issue 1, pages 179–217, February 2014
How to Cite
BASAK, S. and MAKAROV, D. (2014), Strategic Asset Allocation in Money Management. The Journal of Finance, 69: 179–217. doi: 10.1111/jofi.12106
- Issue published online: 7 JAN 2014
- Article first published online: 7 JAN 2014
- Accepted manuscript online: 30 SEP 2013 09:16AM EST
- Manuscript Accepted: 16 JUL 2013
- Manuscript Received: 6 SEP 2009
This paper analyzes the dynamic portfolio choice implications of strategic interaction among money managers who compete for fund flows. We study such interaction between two risk-averse managers in continuous time, characterizing analytically their unique equilibrium investments. Driven by chasing and contrarian mechanisms when one is well ahead, they gamble in the opposite direction when their performance is close. We also examine multiple and mixed-strategy equilibria. Equilibrium policy of each manager crucially depends on the opponent's risk attitude. Hence, client investors concerned about how a strategic manager may trade on their behalf should also learn competitors' characteristics.