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Optimal strategies with option compensation under mean reverting returns or volatilities

Author

Listed:
  • Stefano Herzel

    (University of Rome, Tor Vergata)

  • Marco Nicolosi

    (University of Perugia)

Abstract

We study the problem of a fund manager whose contractual incentive is given by the sum of a constant and a variable term. The manager has a power utility function and the continuous time stochastic processes driving the dynamics of the market prices exhibit mean reversion either in the volatilities or in the expected returns. We provide an approximation for the optimal wealth and for the optimal strategy based on affine processes and the fast Fourier transform.

Suggested Citation

  • Stefano Herzel & Marco Nicolosi, 2019. "Optimal strategies with option compensation under mean reverting returns or volatilities," Computational Management Science, Springer, vol. 16(1), pages 47-69, February.
    • Handle: RePEc:spr:comgts:v:16:y:2019:i:1:d:10.1007_s10287-017-0296-3
    DOI: 10.1007/s10287-017-0296-3
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    References listed on IDEAS

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    Cited by:

    1. Dmytro Ivasiuk, 2019. "An approximate solution for the power utility optimization under predictable returns," Papers 1911.06552, arXiv.org, revised Oct 2021.
    2. Katia Colaneri & Stefano Herzel & Marco Nicolosi, 2021. "The value of knowing the market price of risk," Annals of Operations Research, Springer, vol. 299(1), pages 101-131, April.
    3. Flavio Angelini & Katia Colaneri & Stefano Herzel & Marco Nicolosi, 2021. "Implicit incentives for fund managers with partial information," Computational Management Science, Springer, vol. 18(4), pages 539-561, October.

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