Robust portfolios and weak incentives in long-run investments
Files
Accepted manuscript
Date
2014
Authors
Guasoni, Paolo
Muhle‐Karbe, J.
Xing, Hao
Version
Accepted manuscript
OA Version
Citation
P. Guasoni, J. Muhle‐Karbe, H. Xing. 2014. "ROBUST PORTFOLIOS AND WEAK INCENTIVES IN LONG‐RUN INVESTMENTS." Mathematical Finance, Volume 27, Issue 1. January 2017. pp. 3-37. https://doi.org/10.1111/mafi.12087
Abstract
When the planning horizon is long, and the safe asset grows indefinitely,
isoelastic portfolios are nearly optimal for investors who are close to isoelastic for high wealth, and not too risk averse for low wealth. We prove this result in a general arbitrage-free, frictionless, semimartingale model. As a consequence, optimal portfolios
are robust to the perturbations in preferences induced by common option compensation schemes, and such incentives are weaker when their horizon is longer. Robust option incentives are possible, but require several, arbitrarily large exercise prices, and are not always convex.