Cover IMF Working Papers
Managerial Incentives and Financial Contagion
Author: Mr. Sujit Chakravorti and Mr. Subir Lall
Series:
IMF Working Papers
Volume/Issue:
Volume 2004: Issue 199
Language:
English
Publication Date:
01 Oct 2004
DOI:
https://doi.org/10.5089/9781451860146.001
ISBN:
9781451860146
ISSN:
1018-5941
Pages:
37
Keywords:
WP; emerging market; optimal portfolio; Financial Crises; Index Investors; Global Linkages; emerging market asset; market assets; fund manager; market asset return; asset volatility; investor base; Emerging and frontier financial markets; Securities markets; Asset prices; Currencies; Hedge funds; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper proposes a framework for comovements of asset prices with seemingly unrelated fundamentals, as an outcome of optimal portfolio strategies by fund managers. In emerging markets, dedicated managers outperforming a benchmark index and global managers maximizing absolute returns lead to systematic interactions between asset prices, without asymmetric information. The model determines optimal portfolio weights, the incidence of relative value strategies, and the systematic deviation of prices from fundamentals with limits to arbitraging this differential. Managerial compensation contracts, optimal at the firm level, may lead to inefficiencies at the macroeconomic level. Conditions are identified when shocks in one emerging market affect others.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund