Optimal Contracts in a Continuous-Time Delegated Portfolio Management Problem

Hui Ou-Yang ()

The Review of Financial Studies, 2003, vol. 16, issue 1, 173-208

Abstract: This article studies the contracting problem between an individual investor and a professional portfolio manager in a continuous-time principal-agent framework. Optimal contracts are obtained in closed form. These contracts are of a symmetric form and suggest that a portfolio manager should receive a fixed fee, a fraction of the total assets under management, plus a bonus or a penalty depending upon the portfolio's excess return relative to a benchmark portfolio. The appropriate benchmark portfolio is an active index that contains risky assets where the number of shares invested in each asset can vary over time, rather than a passive index in which the number of shares invested in each asset remains constant over time. Copyright 2003, Oxford University Press.

Date: 2003
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The Review of Financial Studies is currently edited by Itay Goldstein

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