Delegated Portfolio Management under Ambiguity Aversion

Annalisa Fabretti, Stefano Herzel and Mustafa C. Pinar (mustafap@bilkent.edu.tr)
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Mustafa C. Pinar: Bilkent University, Dept of Industrial Engineering

No 304, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: We examine the problem of setting optimal incentives for a portfolio manager hired by an investor who wants to induce ambiguity-robust portfolio choices with respect to estimation errors in expected returns. We consider a one-period model with a set of risky assets (with multivariate normal returns) whose expected returns are estimated with uncertainty and a linear sharing rule between a risk-neutral investor and a risk averse portfolio manager. The manager accepts the contract if the compensation offered is at least as large as a minimum compensation he determines from his minimum acceptable utility level. Adopting a worst-case max-min approach we obtain in closed-form the optimal compensation in various cases where the investor and the manager, respectively adopt or relinquish an ambiguity averse attitude. We apply our result to compute the compensation fees for an investment strategy restricted by Socially Responsible rules. The application shows, for instance, that the additional premium requested by a manager for restricting the investment set should decrease when the aversion to ambiguity increases.

Keywords: Delegated Portfolio Management; ambiguity; robust optimization (search for similar items in EconPapers)
Pages: 27 pages
Date: 2014-02-06, Revised 2014-02-06
New Economics Papers: this item is included in nep-hrm, nep-sog and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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