Portfolio selection, periodic evaluations and risk taking
File(s)
Accepted version
Author(s)
Tse, Alex SL
Zheng, Harry
Type
Journal Article
Abstract
We present a continuous-time portfolio selection problem faced by an agent with S-shaped preference who maximizes the utilities derived from the portfolio’s periodic performance over an infinite horizon. The periodic reward structure creates subtle incentive distortion. In some cases, local risk aversion is induced, which discourages the agent from risk taking in the extreme bad states of the world. In some other cases, eventual ruin of the portfolio is inevitable, and the agent underinvests in the good states of the world to manipulate the basis of subsequent performance evaluations. We outline several important elements of incentive design to contain the long-term portfolio risk.
Date Issued
2023-11
Date Acceptance
2023-06-09
Citation
Operations Research, 2023, 71 (6), pp.2078-2091
ISSN
0030-364X
Publisher
Institute for Operations Research and Management Sciences
Start Page
2078
End Page
2091
Journal / Book Title
Operations Research
Volume
71
Issue
6
Copyright Statement
© 2023, INFORMS. This Author Accepted Manuscript (AAM) is available on immediate open access with a CC-BY License.
License URL
Identifier
https://pubsonline.informs.org/doi/10.1287/opre.2021.0780
Publication Status
Published
Date Publish Online
2023-07-25