We show that benchmark-linked convex incentives can lead risk-averse money managers aware of mispricing to over-invest in overpriced securities. In the model, the managers' risk-seeking behavior varies in response to the interaction of mispricing with convexity and benchmarking concerns....

I present a dynamic investment model in which mutual funds' inferior performance is an equilibrium response to incentives rather than the consequence of low skills. In the model, a skilled (informed) manager responds to investors' flows, which are a convex function of performance relative to...

We study the equilibrium implications on asset prices of institutions' trading with sentiment-driven retail investors. In the model, both the benchmarking concerns of institutions and the (irrational) optimism of retail investors boost the aggregate demand for a stock. We show that the ensuing...