Incentive contracts in delegated portfolio management under VaR constraint

Jiliang Sheng, Xiaoting Wang and Jun Yang

Economic Modelling, 2012, vol. 29, issue 5, 1679-1685

Abstract: This paper studies the incentive effect of linear performance-adjusted contracts in delegated portfolio management under a value-at-risk (VaR) constraint. It is shown that a linear performance-based contract can provide incentives for the portfolio manager to work at acquiring private information under a VaR risk constraint. The expected utility and optimal effort of a risk-averse manager are increasing functions of the return sharing ratio in the contract. However, a risk constraint causes the portfolio manager to reduce effort in gathering private information, suggesting that the VaR constraint increases the moral hazard between the investor and the manager.

Keywords: VaR constraint; Incentive contract; Delegated portfolio management; Private information (search for similar items in EconPapers)
JEL-codes: D81 D82 J33 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:5:p:1679-1685

DOI: 10.1016/j.econmod.2012.05.003

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