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

dual problemincentive schemeMalliavin calculusnonconvex optimizationportfolio optimizationprincipal-agent problemstochastic optimization

Mathematics Subject Classification ID

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

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Cited in

(22)

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

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