Investment Strategies and Compensation of a Mean-Variance Optimizing Fund Manager
44 Pages Posted: 7 Jun 2011 Last revised: 21 Apr 2012
Date Written: April 20, 2012
This paper introduces a general continuous-time mathematical framework for solution of dynamic mean-variance control problems. We obtain theoretical results for two classes of functionals: the first one depends on the whole trajectory of the controlled process and the second one is based on its terminal-time value. These results enable the development of numerical methods for mean-variance problems for a pre-determined risk-aversion coefficient. We apply them to study optimal trading strategies pursued by fund managers in response to various types of compensation schemes. In particular, we examine the effects of continuous monitoring and scheme's symmetry on trading behaviour and fund performance.
Keywords: mean-variance, continuous-time stochastic control, viscosity solutions, investment strategy, managerial compensation
JEL Classification: C61, C63, G11, G23
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