EconPapers    
Economics at your fingertips  
 

Inter‐temporal mutual‐fund management

Alain Bensoussan, Ka Chun Cheung, Yiqun Li and Sheung Chi Phillip Yam

Mathematical Finance, 2022, vol. 32, issue 3, 825-877

Abstract: Traditionally, mutual funds are mostly managed via an ad hoc approach, namely a terminal‐only optimization. Due to the intricate mathematical complexity of a continuum of constraints imposed, effects of the inter‐temporal reward for the managers are essentially neglected in the previous literature. For instance, the inter‐temporal optimal investment problem from the fund manager's viewpoint, who earns proportional management fees continuously (a golden rule in practice), has been outstanding for long. This article completely resolves this challenging question especially under generic running and terminal utilities, via the Dynamic Programming Principle which leads to a nonconventional, highly nonlinear HJB equation. We develop an original mathematical analysis to establish the unique existence of the classical solution of the primal problem. Further numerical calibrations and simulations for both the portfolio weight and the value functions illustrate the robustness of the optimal portfolio towards the manager's risk attitude, which allows different managers with various risk characteristics to sell essentially the same investment vehicle. Simulation studies also indicate that the policy of charging a substantial terminal‐only management fee can be replaced by another one with only a negligible amount over the interim period, which substantially reduces the total management fee paid by the clients without lowering the manager's satisfaction at all; this last observation echoes the magic of the alchemy of finance.

Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/mafi.12349

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:mathfi:v:32:y:2022:i:3:p:825-877

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0960-1627

Access Statistics for this article

Mathematical Finance is currently edited by Jerome Detemple

More articles in Mathematical Finance from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery (contentdelivery@wiley.com).

 
Page updated 2024-12-28
Handle: RePEc:bla:mathfi:v:32:y:2022:i:3:p:825-877