Robust Portfolios and Weak Incentives in Long Run Investments

35 Pages Posted: 11 Jun 2013 Last revised: 8 Oct 2013

See all articles by Paolo Guasoni

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences; University of Bologna - Department of Statistics

Johannes Muhle-Karbe

Imperial College London - Department of Mathematics

Hao Xing

Boston University - Questrom School of Business

Date Written: June 11, 2013

Abstract

When the planning horizon is long, and the safe asset grows indefinitely, iso-elastic portfolios are nearly optimal for investors who are close to iso-elastic for high wealth, and not too risk averse for low wealth. We prove this result in a general arbitrage-free, frictionless, semi-martingale model. As a consequence, optimal portfolios are robust to the perturbations in preferences induced by common option compensation schemes, and such incentives are weaker when their horizon is longer. Robust option incentives are possible, but require several arbitrarily large exercise prices, and are not always convex.

Keywords: long run, portfolio choice, incentives, executive compensation

JEL Classification: G11, J33

Suggested Citation

Guasoni, Paolo and Guasoni, Paolo and Muhle-Karbe, Johannes and Xing, Hao, Robust Portfolios and Weak Incentives in Long Run Investments (June 11, 2013). Boston U. School of Management Research Paper No. 2013-5, Available at SSRN: https://ssrn.com/abstract=2277531 or http://dx.doi.org/10.2139/ssrn.2277531

Paolo Guasoni (Contact Author)

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

University of Bologna - Department of Statistics ( email )

Bologna, 40126
Italy

Johannes Muhle-Karbe

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 1NE
United Kingdom

HOME PAGE: http://www.ma.imperial.ac.uk/~jmuhleka/

Hao Xing

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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