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ROBUST PORTFOLIOS AND WEAK INCENTIVES IN LONG‐RUN INVESTMENTS
Author(s) -
Guasoni Paolo,
MuhleKarbe Johannes,
Xing Hao
Publication year - 2017
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/mafi.12087
Subject(s) - semimartingale , incentive , economics , asset (computer security) , arbitrage , utility maximization , microeconomics , utility maximization problem , econometrics , financial economics , mathematical economics , mathematics , computer science , computer security
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.