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Yuki Sato, Fund Tournaments and Asset Bubbles, Review of Finance, Volume 20, Issue 4, July 2016, Pages 1383–1426, https://doi.org/10.1093/rof/rfv044
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Abstract
This article studies how fund managers’ relative-performance concerns affect their investment strategies in bubble periods. The managers compete for flows that are sensitive to their performance ranking. Severe ranking tournaments with highly convex flow-performance relationship lead managers to ride bubbles to outperform each other, making bubbles long-lived. However, moderate tournaments may lead them to attack bubbles quickly. The results are consistent with the observed cross-sectional variation in funds’ investment strategies in bubble periods. Bubble-riding behavior is pronounced if the funds’ tournament is too close to call, as interim followers try to catch up while interim leaders try to stay ahead.