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Asset pricing under optimal contracts

Cvitanić, Jakŝa and Xing, Hao (2018) Asset pricing under optimal contracts. Journal of Economic Theory, 173. pp. 142-180. ISSN 1095-7235

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Identification Number: 10.1016/j.jet.2017.10.005


We consider the problem of finding equilibrium asset prices in a financial market in which a portfolio manager (Agent) invests on behalf of an investor (Principal), who compensates the manager with an optimal contract. We extend a model from Buffa, Vayanos and Woolley (2014) by allowing general contracts, and by allowing the portfolio manager to invest privately in individual risky assets or the index. To alleviate the effect of moral hazard, Agent is optimallycompensated by benchmarking to the index, which, however, may incentivize him to be too much of a “closet indexer”. To counter those incentives, the optimal contract rewards Agent for taking specific risk of individual assets in excess of the systematic risk of the index, by rewarding the deviation between the portfolio return and the return of an index portfolio, and the deviation’s quadratic variation.

Item Type: Article
Official URL:
Additional Information: © 2017 Elsevier
Divisions: Statistics
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C61 - Optimization Techniques; Programming Models; Dynamic Analysis
C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages; Payment Methods
M - Business Administration and Business Economics; Marketing; Accounting > M5 - Personnel Economics > M52 - Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs, seniority issues)
Date Deposited: 25 Oct 2017 08:27
Last Modified: 31 May 2024 18:36

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