Portfolio optimization under convex incentive schemes

DOI10.1007/S00780-014-0236-9zbMATH Open1360.91132arXiv1109.2945OpenAlexW2952196743MaRDI QIDQ2255013FDOQ2255013

Maxim Bichuch, Stephan Sturm

Publication date: 6 February 2015

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

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.

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)

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Cited In (18)

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• 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
• Risk management under weighted limited expected loss
• Constrained non-concave utility maximization: an application to life insurance contracts with guarantees
• PROFIT SHARING IN HEDGE FUNDS
• Non-concave expected utility optimization with uncertain time horizon
• A Classification Approach to General S-Shaped Utility Optimization with Principals' Constraints
• ROBUST PORTFOLIOS AND WEAK INCENTIVES IN LONG-RUN INVESTMENTS
• Entrepreneurial Decisions on Effort and Project with a Nonconcave Objective Function
• Optimal Control of DC Pension Plan Management under Two Incentive Schemes
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• 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
• The importance of dynamic risk constraints for limited liability operators
• Individual and cooperative portfolio optimization as linear program

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