 Optimal benchmarking for active portfolio managersAbraham Lioui () and Patrice Poncet European Journal of Operational Research, 2013, vol. 226, issue 2, 268-276 Abstract: Within an agency theoretic framework adapted to the portfolio delegation issue, we show how to construct optimal benchmarks. In accordance with US regulations, the benchmark-adjusted compensation scheme is taken to be symmetric. The investor’s control consists in forcing the manager to adopt the appropriate benchmark so that his first-best optimum is attained. Solving simultaneously the manager’s and the investor’s dynamic optimization programs in a fairly general framework, we characterize the optimal benchmark. We then provide completely explicit solutions when the investor’s and the manager’s utility functions exhibit different CRRA parameters. We find that, even under optimal benchmarking, it is never optimal for the manager, and therefore for the investor, to follow exactly the benchmark, except in a very restrictive case. We finally assess by simulation the practical importance, in particular in terms of the investor’s welfare, of selecting a sub-optimal benchmark. Keywords: Benchmarking; Incentive fees; Mutual funds; Continuous time trading; Martingale approach; Principal-agent model (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:226:y:2013:i:2:p:268-276 DOI: 10.1016/j.ejor.2012.10.043 Access Statistics for this article European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati More articles in European Journal of Operational Research from Elsevier |
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