Tse, Alex;
Zheng, Harry;
(2023)
Portfolio Selection, Periodic Evaluations and Risk Taking.
Operations Research
10.1287/opre.2021.0780.
(In press).
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Abstract
We present a continuous-time portfolio selection problem faced by an agent with S-shaped preference who maximizes the utilities derived from the portfolio’s periodic performance over an infinite horizon. The periodic reward structure creates subtle incentive distortion. In some cases, local risk aversion is induced, which discourages the agent from risk taking in the extreme bad states of the world. In some other cases, eventual ruin of the portfolio is inevitable, and the agent underinvests in the good states of the world to manipulate the basis of subsequent performance evaluations. We outline several important elements of incentive design to contain the long-term portfolio risk.
| Type: | Article |
|---|---|
| Title: | Portfolio Selection, Periodic Evaluations and Risk Taking |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1287/opre.2021.0780 |
| Publisher version: | https://doi.org/10.1287/opre.2021.0780 |
| Language: | English |
| Additional information: | This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions. |
| Keywords: | Portfolio selection, S-shaped utility, periodic evaluation, agency, incentive |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Mathematics |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10172354 |
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