Robust portfolios and weak incentives in long-run investments

Paolo Guasoni, Johannes Muhle-Karbe and Hao Xing

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 (search for similar items in EconPapers)
JEL-codes: G11 J33 (search for similar items in EconPapers)
Date: 2017-01-01
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Citations: View citations in EconPapers (1)

Published in Mathematical Finance, 1, January, 2017, 27(1), pp. 3-37. ISSN: 0960-1627

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