Study On The PBF Contract In The Delegated Portfolio Management

In modern financial market, more and more financial wealth is not managed directly by savers, but through a financial intermediary, and investment is predominantly delegated investment. This paper extends and develops the theory of delegated portfolio management. This paper studies the incentive role of Performance-Based Fees under some conditions, and studies the effect of PBF on the risk taking behavior of the mutual fund and the asset pricing based on PBF with the game theory, principal-agent theory and modern financial theory.Firstly, this paper studies the incentive role of linear Performance-Based Fees when the cost of information is exists and shows that PBF contract with benchmark portfolio can incentive the manager to work hard, and gets the optimal risk sharing ratio between the investor and the manager. This paper analyses the effect of quality of the benchmark portfolio on PBF contract when the benchmark is written in the PBF contract.Secondly, this paper study the incentive of a linear PBF contract in the delegated portfolio management when the manager possesses market power, which affects the equilibrium price of securities in the market. A linear contract provides incentives to the manager to work at acquiring information when the manager possesses market power. We get the optimal PBF contract and analyze the property of the optimal contract.Thirdly, this paper study the affect of explicit and implicit incentive on risk taking behavior to the mutual fund with PBF contract though a game model which exits a unique mixed-strategy. We show that probability of holding higher risk asset to the mid-year winning manager is larger than that to the mid-year losing one in mutual fund tournaments and analyze the property of the probability. Then, this paper studies the impacts of two kinds of asymmetry on the risk-taking behavior of the mutual fund which management fee is asymmetric PBF. We show that the impacts of the degree of the asymmetry of the contract and of the cash flow on the risk-taking behavior of the fund are opposite. When the two kinds of asymmetry are together, any asymmetry decrease the impact of the other one on risking-taking behavior of the fund. We study the relationship of performance and risk of mutual fund with a dynamic model of asset selection, and show that the variance of the rate of fund does not increase all the time when the relative performance decline, but the standard variance of tracking error increases. The empirical study supports the result using China mutual fund data. We study the performance threshold value of risk taking to mutual fund, and show that the fund hold higher risk asset when performance is lager than the threshold value.Finally, this paper studies the asset pricing based on the PBF contract. We drive an asset pricing model when the market is clearing. This paper shows that the linear relationship of CAPM still holds and there are three betas, and the risk of market and benchmark portfolio is priced in this model. We did empirical study on this model using Shanghai security market data. We study the effect of asymmetric PBF on asset price, and show that the larger the degree of asymmetric is, the higher the asset price becomes.