Parida, Sitikantha
(2012)
Essays on delegated portfolio management.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis contains three essays on delegated portfolio management and deals with
issues such as impact of regulations on mutual fund performance, impact of competition
on transparency in financial markets and strategic trading behaviour of agents in illiquid
markets.
Chapter 1 analyses the impact of more frequent portfolio disclosure on mutual funds
performance. Since 2004, SEC requires all U.S. mutual funds to disclose their portfolio
holdings on a quarterly basis from semi-annual previously. This change in regulation provides
a natural setting to study the impact of disclosure frequency on the performance of mutual
funds. Prior to the policy change, it finds that the semi-annual funds with high abnormal
returns in the past year outperform the corresponding quarterly funds by 17-20 basis points a
month. This difference in performance disappears after 2004. The reduction in performance
is higher for semi-annual funds holding illiquid assets than those holding liquid assets. These
results support the hypothesis that performance of funds with more disclosure suffers more
from activities such as front running.
Chapter 2 analyses the impact of competition in financial markets on incentives to re-
veal information. It finds that discretionary portfolio disclosure and advertising expenses of
mutual funds decrease with competition. This supports the theory that mutual funds use
portfolio disclosure and advertising as marketing tools to attract new investments in a financial market, where superior relative performance and greater visibility are rewarded with
convex payoffs. With higher competition, the likelihood of landing new investments goes
down for each fund while the cost of disclosure goes up. Funds respond by cutting down on
costly disclosures and advertising activities. Thus competition seems to have adverse impact
on market transparency and search cost.
3Chapter 3 develops a model of strategic trading to study forced liquidation. Traders who
hold an illiquid risky security have to satisfy minimum capital requirements, or liquidate their
position. Therefore, traders with price impact can induce the fire sale of others to benefit
from future low prices. It shows that if traders have similar proportions of wealth invested
in the risky security, or the market is sufficiently liquid, they behave cooperatively and
smooth their orders over several trading periods. However, if the proportions are significantly
different across agents, and market liquidity is low, the strong agent, who is less exposed to
the risky asset, predates on the weak agent, and forces her to exit the market.
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