Dividing gains between a client and her agent

Jianming Xia ()
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Jianming Xia: Institute of Applied Mathematics, Academy of Mathematics and System Sciences Chinese Academy of Sciences, P.O. Box 2734, Beijing 100080, China Manuscript

Finance and Stochastics, 2003, vol. 7, issue 2, 219-230

Abstract: A client(she) contracts with an agent(him), who has limited liability, as follows: she lends him one dollar at time 0 and he uses the money to trade in a security market. As return, he promises to give her a fixed amount $e^{r_0T}$ at the final time T; in addition, if the real return rate of the strategy is larger than $r_0$, she can also get a fixed proportion $(1-\alpha)$ of the "excess profit" and he will take the rest. Assume that the market is complete and the agent aims to maximize the risk-neutral value of his profit subject to some expected shortfall constraint. The reasonable benchmark return rate $r_0$ and the proportion $\alpha$ are explicitly worked out.

Keywords: Agency; investment; Neyman-Pearson lemma; complete market (search for similar items in EconPapers)
JEL-codes: D80 G11 G20 (search for similar items in EconPapers)
Date: 2002-12-10
Note: received: April 2001; final version received: June 2002
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