Portfolio optimization under convex incentive schemes

DOI10.1007/S00780-014-0236-9MaRDI QIDQ2255013zbMATH OpenOpenAlexFDO

Authors Maxim Bichuch, Stephan Sturm

Publication date 6 February 2015

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1109.2945

zbMATH Keywords

Malliavin calculusnonconvex optimizationstochastic optimizationportfolio optimizationprincipal-agent problemdual problemincentive scheme

Mathematics Subject Classification ID

Portfolio theory (91G10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Optimal stochastic control (93E20)

Abstract: We consider the terminal wealth utility maximization problem from the point of view of a portfolio manager who is paid by an incentive scheme, which is given as a convex function $g$ of the terminal wealth. The manager's own utility function $U$ is assumed to be smooth and strictly concave, however the resulting utility function $Ucircg$ fails to be concave. As a consequence, the problem considered here does not fit into the classical portfolio optimization theory. Using duality theory, we prove wealth-independent existence and uniqueness of the optimal portfolio in general (incomplete) semimartingale markets as long as the unique optimizer of the dual problem has a continuous law. In many cases, this existence and uniqueness result is independent of the incentive scheme and depends only on the structure of the set of equivalent local martingale measures. As examples, we discuss (complete) one-dimensional models as well as (incomplete) lognormal mixture and popular stochastic volatility models. We also provide a detailed analysis of the case where the unique optimizer of the dual problem does not have a continuous law, leading to optimization problems whose solvability by duality methods depends on the initial wealth of the investor.

Recommendations

• Convex duality in constrained portfolio optimization
• Convex duality theory for optimal investment
• Convex duality in constrained mean-variance portfolio optimization
• Dynamic robust duality in utility maximization
• On utility maximization under convex portfolio constraints

Cites work

• scientific article; zbMATH DE number 1667417 (Why is no real title available?)
• scientific article; zbMATH DE number 785439 (Why is no real title available?)
• A Stochastic Calculus Model of Continuous Trading: Optimal Portfolios
• A generalized clark representation formula, with application to optimal portfolios
• Constrained nonsmooth utility maximization without quadratic inf convolution
• Dual formulation of the utility maximization problem under transaction costs
• Dual formulation of the utility maximization problem: the case of nonsmooth utility.
• Interest rate models -- theory and practice. With smile, inflation and credit
• Malliavin differentiability of the Heston volatility and applications to option pricing
• Martingale representation theorems for initially enlarged filtrations.
• Measure theory. Vol. I and II
• Minimal sufficient conditions for a primal optimizer in nonsmooth utility maximization
• Multiscale stochastic volatility for equity, interest rate, and credit derivatives.
• Necessary and sufficient conditions in the problem of optimal investment in incomplete markets
• On changes of measure in stochastic volatility models
• Optimal Portfolio and Consumption Decisions for a “Small Investor” on a Finite Horizon
• Optimal investment with deferred capital gains taxes
• Optimal investment with high-watermark performance fee
• Optimal portfolio delegation when parties have different coefficients of risk aversion
• Optimum consumption and portfolio rules in a continuous-time model
• Regime-switching risk: to price or not to price?
• The asymptotic elasticity of utility functions and optimal investment in incomplete markets
• The incentives of hedge fund fees and high-water marks
• The mathematics of arbitrage
• Utility maximization with a given pricing measure when the utility is not necessarily concave

Cited in

(19)

• Weighted utility optimization of the participating endowment contract
• OPTIMAL INVESTMENT IN HEDGE FUNDS UNDER LOSS AVERSION
• Nonconcave Optimal Investment with Value-at-Risk Constraint: An Application to Life Insurance Contracts
• Portfolio management with benchmark related incentives under mean reverting processes
• Optimal investment problem under behavioral setting: a Lagrange duality perspective
• Constrained non-concave utility maximization: an application to life insurance contracts with guarantees
• Entrepreneurial decisions on effort and project with a nonconcave objective function
• Risk management under weighted limited expected loss
• PROFIT SHARING IN HEDGE FUNDS
• Robust portfolios and weak incentives in long-run investments
• Non-concave expected utility optimization with uncertain time horizon
• Optimal Control of DC Pension Plan Management under Two Incentive Schemes
• Reward schemes
• A classification approach to general s-shaped utility optimization with principals' constraints
• Utility maximization with a given pricing measure when the utility is not necessarily concave
• Portfolio optimization with a guaranteed minimum maturity benefit and risk-adjusted fees
• Optimal investment with S-shaped utility and trading and value at risk constraints: an application to defined contribution pension plan
• Individual and cooperative portfolio optimization as linear program
• The importance of dynamic risk constraints for limited liability operators

This page was built for publication: Portfolio optimization under convex incentive schemes

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2255013)