Optimal contract for a fund manager with capital injections and endogenous trading constraints

DOI10.1137/18M1172867;MaRDI QIDQ4971978zbMATH OpenFDO

Authors Sergey Nadtochiy, Thaleia Zariphopoulou

Publication date 22 November 2019

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1802.09165, https://epubs.siam.org/doi/pdf/10.1137/18M1172867

zbMATH Keywords

stochastic partial differential equationoptimal investmentoptimal contractcapital injectionsdelegated portfolio managementfund managerinverse Merton problem

Mathematics Subject Classification ID

Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Portfolio theory (91G10) Financial applications of other theories (91G80) Contract theory (moral hazard, adverse selection) (91B41)

Abstract: In this paper, we construct a solution to the optimal contract problem for delegated portfolio management of the fist-best (risk-sharing) type. The novelty of our result is (i) in the robustness of the optimal contract with respect to perturbations of the wealth process (interpreted as capital injections), and (ii) in the more general form of principals objective function, which is allowed to depend directly on the agents strategy, as opposed to being a function of the generated wealth only. In particular, the latter feature allows us to incorporate endogenous trading constraints in the contract. We reduce the optimal contract problem to the following inverse problem: for a given portfolio (defined in a feedback form, as a random field), construct a stochastic utility whose optimal portfolio coincides with the given one. We characterize the solution to this problem through a Stochastic Partial Differential Equation (SPDE), prove its well-posedness, and compute the solution explicitly in the Black-Scholes model.

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(12)

• Polyperiod optimal incentive contract in capital market under the condition of overconfidence
• Optimal liquidation with dynamic parameter updating: a forward approach
• Optimal Brokerage Contracts in Almgren–Chriss Model with Multiple Clients
• Optimal strategy for a fund manager with option compensation
• Optimal contracts in portfolio delegation
• The optimal interaction between a hedge fund manager and investor
• Portfolio selection of a closed-end mutual fund
• Optimal contract for delegated portfolio management with moral hazard
• Asset pricing under optimal contracts
• Raising and allocation capital principles as optimal managerial contracts
• Forward rank‐dependent performance criteria: Time‐consistent investment under probability distortion
• Portfolio delegation under short-selling constraints

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