Optimal Contracts in a Continuous-Time Delegated Portfolio Management Problem
AbstractThis 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.
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Bibliographic InfoArticle provided by Society for Financial Studies in its journal The Review of Financial Studies.
Volume (Year): 16 (2003)
Issue (Month): 1 ()
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Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
Web page: http://www.rfs.oupjournals.org/
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- Peter M. DeMarzo & Yuliy Sannikov, 2004. "A Continuous-Time Agency Model of Optimal Contracting and Capital Structure," NBER Working Papers 10615, National Bureau of Economic Research, Inc.
- Igan, Deniz & Pinheiro, Marcelo, 2012. "The effects of relative performance objectives on financial markets," MPRA Paper 43452, University Library of Munich, Germany.
- Gary Gorton & Ping He & Lixin Huang, 2006. "Asset Prices When Agents are Marked-to-Market," NBER Working Papers 12075, National Bureau of Economic Research, Inc.
- Egil Matsen, 2005.
"Portfolio choice when managers control returns,"
2005/15, Norges Bank.
- Agarwal, Vikas & Gómez, Juan-Pedro & Priestley, Richard, 2012. "Management compensation and market timing under portfolio constraints," CFR Working Papers 11-16 [rev.], University of Cologne, Centre for Financial Research (CFR).
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