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Dividing gains between a client and her agent

Author

Listed:
  • Jianming Xia

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

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.

Suggested Citation

  • Jianming Xia, 2003. "Dividing gains between a client and her agent," Finance and Stochastics, Springer, vol. 7(2), pages 219-230.
    • Handle: RePEc:spr:finsto:v:7:y:2003:i:2:p:219-230
    Note: received: April 2001; final version received: June 2002
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    More about this item

    Keywords

    Agency; investment; Neyman-Pearson lemma; complete market;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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