Asset Prices When Agents are Marked-to-Market / Gary Gorton, Ping He, Lixin Huang.

Format:

Book

Author/Creator:

Gorton, Gary.

Contributor:

National Bureau of Economic Research.

He, Ping.

Huang, Lixin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12075.

NBER working paper series no. w12075

Language:

English

Subjects (All):

Assets (Accounting).

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Cambridge : National Bureau of Economic Research, 2006.

Summary:

"Risk management" in securities markets refers to the oversight of portfolio managers and professional traders when they trade on behalf of investors in security markets. Monitoring of their trading performance, profit and loss, and risk-taking behavior, is measured by principals using security market prices. We study the optimality of the practice of marking-to-market and provide conditions under which investing principals should optimally monitor their agent traders using market prices to measure traders' performance. Asset prices, however, can be affected by mark-to-market contracts. We show that such contracts introduce an externality when there are many traders. Traders may rationally herd, trading on irrelevant information. Ironically, this causes asset prices to be less informative than they would be without the mark-to-market feature.

Notes:

Print version record

March 2006.