Robust Portfolios and Weak Incentives in Long‐Run Investments

35 Pages Posted: 15 Jan 2017

See all articles by Paolo Guasoni

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences

Johannes Muhle‐Karbe

University of Michigan at Ann Arbor

Hao Xing

London School of Economics & Political Science (LSE)

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Date Written: January 2017

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.

Keywords: long run, portfolio choice, incentives, executive compensation

Suggested Citation

Guasoni, Paolo and Muhle‐Karbe, Johannes and Xing, Hao, Robust Portfolios and Weak Incentives in Long‐Run Investments (January 2017). Mathematical Finance, Vol. 27, Issue 1, pp. 3-37, 2017. Available at SSRN: https://ssrn.com/abstract=2899171 or http://dx.doi.org/10.1111/mafi.12087

Paolo Guasoni (Contact Author)

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

Johannes Muhle‐Karbe

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Hao Xing

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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