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Optimal contract for a fund manager, with capital injections and endogenous trading constraints

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  • Sergey Nadtochiy
  • Thaleia Zariphopoulou

Abstract

In this paper, we construct a solution to the optimal contract problem for delegated portfolio management of the fist-best (risk-sharing) type. The novelty of our result is (i) in the robustness of the optimal contract with respect to perturbations of the wealth process (interpreted as capital injections), and (ii) in the more general form of principals objective function, which is allowed to depend directly on the agents strategy, as opposed to being a function of the generated wealth only. In particular, the latter feature allows us to incorporate endogenous trading constraints in the contract. We reduce the optimal contract problem to the following inverse problem: for a given portfolio (defined in a feedback form, as a random field), construct a stochastic utility whose optimal portfolio coincides with the given one. We characterize the solution to this problem through a Stochastic Partial Differential Equation (SPDE), prove its well-posedness, and compute the solution explicitly in the Black-Scholes model.

Suggested Citation

  • Sergey Nadtochiy & Thaleia Zariphopoulou, 2018. "Optimal contract for a fund manager, with capital injections and endogenous trading constraints," Papers 1802.09165, arXiv.org.
    • Handle: RePEc:arx:papers:1802.09165
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    File URL: http://arxiv.org/pdf/1802.09165
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    References listed on IDEAS

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    Cited by:

    1. Chong, Wing Fung, 2019. "Pricing and hedging equity-linked life insurance contracts beyond the classical paradigm: The principle of equivalent forward preferences," Insurance: Mathematics and Economics, Elsevier, vol. 88(C), pages 93-107.
    2. Xue Dong He & Moris S. Strub & Thaleia Zariphopoulou, 2019. "Forward Rank-Dependent Performance Criteria: Time-Consistent Investment Under Probability Distortion," Papers 1904.01745, arXiv.org.

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