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Adverse Risk Incentives and the Design of Performance-Based Contracts Author info | Abstract | Publisher info | Download info | Related research | Statistics Mark Grinblatt
Sheridan Titman
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In this paper, option pricing theory is used to value and analyze many performance-based fee contracts that are currently in use. A potential problem with some of these contracts is that they may induce portfolio managers to adversely alter the risk of the portfolio they manage. This paper is prescriptive, in that it derives conditions for contract parameters that provide proper risk incentives for classes of investment strategies. For buy-and-hold and rebalancing strategies, adverse risk incentives are avoided when the penalties for poor performance outweigh the rewards for good performance.
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Paper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number
21-88.
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Handle: RePEc:fth:pennfi:21-88Contact details of provider: Postal: 3254 Steinberg Hall-Dietrich Hall, Philadelphia, PA 19104-6367 Phone: (215) 898-7616 Fax: (215) 573-8084 Email: Web page: http://finance.wharton.upenn.edu/~rlwctr/ More information through EDIRC
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Athanasios Orphanides, 1996.
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