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Equilibrium-Informed Trading with Relative Performance Measurement

Published online by Cambridge University Press:  31 October 2017

Zhigang Qiu
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Abstract

This article analyzes the informative trading of professional money managers within a rational-expectations equilibrium model in which managers care about their performance relative to their peer group. I find that the existence of uninformed managers causes informed managers with relative performance concerns to trade less informatively, engendering less informative prices. When managers are differentially informed, they need to forecast the average performance based on private signals, and each manager may place more weight on the private signal if the signal provides good information about the average performance. The price aggregates those signals and thus becomes more informative.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 5 , October 2017 , pp. 2083 - 2118
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

This article is a revised version of my dissertation at the London School of Economics. I am extremely grateful to my supervisors Dimitri Vayanos and Kathy Yuan for their continuous encouragement and invaluable guidance. I also thank an anonymous referee, Hendrik Bessembinder (the editor), Margaret Bray, Amil Dasgupta, Jason Donaldson, Jennifer Huang, Shiyang Huang, Tingjun Liu, Yves Nosbusch, Qi Shang, Ke Tang, and seminar participants at the Cheung Kong Graduate School of Business, the London School of Economics, and Renmin University of China for very helpful comments. Research funding from Renmin University of China (Grant No. 15XNL015) is acknowledged. All errors are my own.

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