Robust Portfolios and Weak Incentives in Long-Run Investments
AbstractWhen the planning horizon is long, and the safe asset grows indefinitely, isoelastic portfolios are nearly optimal for investors who are close to isoelastic for high wealth, and not too risk averse for low wealth. We prove this result in a general arbitrage-free, frictionless, semimartingale 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.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1306.2751.
Date of creation: Jun 2013
Date of revision: Aug 2014
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- NEP-ALL-2013-06-16 (All new papers)
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