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.

This paper examines the general-attention-grabbing effect of daily price limits in China's stock market. We show that stocks with large exposure to daily price limits attract more investor attention and have lower future returns. The exposure is measured empirically through the absolute beta with respect to the daily proportion of stocks that hit price limits. The general-attention-grabbing effect is not solely caused by stocks that recently hit price limits, is not subsumed by market volatility exposure, and does not reflect other stock market characteristics. Moreover, the effect is stronger among stocks that are heavily invested in by retail investors.

We propose an equilibrium asset pricing model in which agents with heterogeneous beliefs care about relative performance. We find that the concern with relative performance leads agents to trade more similarly, a development that has two effects. First, similar trading directly decreases volatility. Second, similar trading decreases the impact of dominant agents. The second effect dominates the first when agents expect large differences between their final performances, and vice versa when agents expect small differences between their final performances. Compared with the case in which agents are unconcerned about relative performance, the stock return volatility is higher when the second effect dominates, and lower when the first effect dominates. This paper also demonstrates that the concern about relative performance influences investors’ holdings, stock prices and risk premia.

This paper investigates the effects of relative performance concerns on fund managers’ behavior when managers are heterogeneous in their risk management practices. We find that relative performance concerns have distinct effects on different managers as follows: managers without risk management constraints conduct risk management, while those with risk management constraints do not change their trading. Our results suggest that a small number of fund managers with risk management requirements can have a significant impact on the market. Our theory can potentially reconcile the long-lasting debate regarding the impact of risk management on financial markets.