Tournament-induced risk-shifting: A mean field games approach

Issue title: Risk Finance

Article type: Research Article

Authors: Guéant, Olivier

Affiliations: UFR de Mathématiques, Université Paris-Diderot, 175, rue du Chevaleret, 75013 Paris, France. E-mail: [email protected]

Abstract: The agency problem between an investor and his mutual funds managers has long been studied in the economic literature. Because the very business of mutual funds managers is not only to manage money but also, and rather, to increase the money under management, one of the numerous agency problems is the implicit incentive induced by the relationship between inflows and performance. If the consequences of incentives, be they implicit or explicit – as for compensation schemes of individual asset managers – are well known in terms of risk-shifting when the incentives are linked to a benchmark, the very fact that the mutual fund market is a tournament does not seem to be modeled properly in the literature. In this paper, we propose a mean field games model to quantify the risk-shifting induced by a tournament-like competition between mutual funds.

Keywords: Optimal portfolio choice, mean field games

DOI: 10.3233/RDA-120091

Journal: Risk and Decision Analysis, vol. 4, no. 2, pp. 71-80, 2013