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Robust portfolios and weak incentives in long-run investments

Guasoni, Paolo, Muhle-Karbe, Johannes and Xing, Hao (2017) Robust portfolios and weak incentives in long-run investments. Mathematical Finance, 27 (1). pp. 3-37. ISSN 0960-1627

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Identification Number: 10.1111/mafi.12087


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.

Item Type: Article
Official URL:
Additional Information: © 2014 Wiley Periodicals, Inc.
Divisions: Statistics
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics
JEL classification: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages; Payment Methods
Date Deposited: 22 Dec 2014 12:17
Last Modified: 16 May 2024 02:24
Projects: Project D1 (Mathematical Methods in Financial Risk Management), 278295, DMS-1109047, 07/MI/008, 07/SK/M1189, 08/SRC/FMC1389, RG-248896
Funders: ERC (278295), NSF (DMS-1109047), SFI (07/MI/008, 07/SK/M1189, 08/SRC/FMC1389), FP7 (RG-248896), STICERD, LSE, NCCR FINRISK, Swiss National Science Foundation (SNF), European Research Council, National Science Foundation, Science Foundation Ireland, Seventh Framework Programme

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