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Dividing gains between a client and her agent

  • Jianming Xia


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

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    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.

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    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 7 (2003)
    Issue (Month): 2 ()
    Pages: 219-230

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    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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