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Asset pricing under optimal contracts

Cvitanić, Jakša and Xing, Hao (2018) Asset pricing under optimal contracts. Journal of Economic Theory, 173 . pp. 142-180. ISSN 0022-0531. http://resolver.caltech.edu/CaltechAUTHORS:20171114-155621178

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Abstract

We consider the problem of finding equilibrium asset prices in a financial market in which a portfolio manager (Agent) invests on behalf of an investor (Principal), who compensates the manager with an optimal contract. We extend a model from Buffa, Vayanos and Woolley (2014) by allowing general contracts, and by allowing the portfolio manager to invest privately in individual risky assets or the index. To alleviate the effect of moral hazard, Agent is optimally compensated by benchmarking to the index, which, however, may incentivize him to be too much of a “closet indexer”. To counter those incentives, the optimal contract rewards Agent for taking specific risk of individual assets in excess of the systematic risk of the index, by rewarding the deviation between the portfolio return and the return of an index portfolio, and the deviation's quadratic variation.


Item Type:Article
Related URLs:
URLURL TypeDescription
https://doi.org/10.1016/j.jet.2017.10.005DOIArticle
http://www.sciencedirect.com/science/article/pii/S0022053117301072PublisherArticle
ORCID:
AuthorORCID
Cvitanić, Jakša0000-0001-6651-3552
Additional Information:© 2017 Elsevier Inc. Received 21 February 2017, Revised 10 October 2017, Accepted 16 October 2017, Available online 9 November 2017. We would like to express our gratitude to Andrea Buffa, Dylan Possamaï and Nizar Touzi for helpful discussions, as well as to the anonymous Associate Editor and referees for their helpful comments and suggestions.
Subject Keywords:Asset-management; Equilibrium asset pricing; Optimal contracts; Principal–agent problem
Classification Code:JEL classification: C61; C73; D82; J33; M52
Record Number:CaltechAUTHORS:20171114-155621178
Persistent URL:http://resolver.caltech.edu/CaltechAUTHORS:20171114-155621178
Official Citation:Jakša Cvitanić, Hao Xing, Asset pricing under optimal contracts, In Journal of Economic Theory, Volume 173, 2018, Pages 142-180, ISSN 0022-0531, https://doi.org/10.1016/j.jet.2017.10.005. (http://www.sciencedirect.com/science/article/pii/S0022053117301072)
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:83211
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:15 Nov 2017 00:36
Last Modified:15 Nov 2017 00:36

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