Mitigating the Principal - Agent Problem in Delegated Portfolio Management

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Reference

Kaiser, L. (2012). Mitigating the Principal - Agent Problem in Delegated Portfolio Management. University of Liechtenstein.

Publication type

Working Paper

Abstract

The principal-agent problem plays a significant role in delegated portfolio management, as many money managers (agents) maximise their personal utility at the cost of the investor (principal). Existing literature has primarily focused on producing optimal contracts, including incentive compensation and monitoring procedures, to contempt the issue of moral hazard. In this study we suggest Bayesian portfolio construction in form of the Black-Litterman model as a way to mitigate moral hazard in delegated portfolio management (DPM). The models natural characteristics offer an intuitive solution to many issues of moral hazard in this specific context. The theoretical results indicate that the application of such a model can indeed reduce many of the outstanding issues of moral hazard in DPM such as agent's overconfidence, large turnover, costly monitoring, excessive risk taking and resurrection. Existing research suggests the implementation of allocation constraints on the agent to reduce moral hazard in DPM, this study was the first to introduce a concrete model and evaluate its potential on theoretical grounds.

Research

Quantitative Investment Management and Portfolio Optimisation
PhD-Thesis, March 2011 until February 2015 (finished)

Overall, the proposed dissertation project aims to contribute to academic literature by identifying research gaps in the field of quantitative investment management and answering the respective by ... more ...

Persons

Organizational Units

  • Institute for Financial Services
  • Chair in Business Administration, Banking and Financial Management