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Optimal risk taking under high-water mark contract with jump risk

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  • Mu, Congming
  • Yan, Jingzhou
  • Liang, Zhian

Abstract

This paper studies the effects of jump risk in returns on the hedge fund manager’s optimal risk taking under high-water mark contract. The results show that the fund manager’s optimal risk taking under jump-diffusion risk is not a simple combination of that under pure-jump risk and pure-diffusion risk. The increase in jump intensity and jump size discourages the fund manager’s risk choice.

Suggested Citation

  • Mu, Congming & Yan, Jingzhou & Liang, Zhian, 2021. "Optimal risk taking under high-water mark contract with jump risk," Finance Research Letters, Elsevier, vol. 38(C).
    • Handle: RePEc:eee:finlet:v:38:y:2021:i:c:s1544612319303599
    DOI: 10.1016/j.frl.2020.101460
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    References listed on IDEAS

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    1. Zhao, Li & Huang, Wenli & Ba, Shusong, 2018. "Optimal effort under high-water mark contracts," Economic Modelling, Elsevier, vol. 68(C), pages 599-610.
    2. Andrea Buraschi & Robert Kosowski & Worrawat Sritrakul, 2014. "Incentives and Endogenous Risk Taking: A Structural View on Hedge Fund Alphas," Journal of Finance, American Finance Association, vol. 69(6), pages 2819-2870, December.
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    Cited by:

    1. Yan, Jingzhou & Mu, Congming & Yan, Qianhui & Luo, Deqing, 2023. "Robust leverage choice of hedge funds with rare disasters," Finance Research Letters, Elsevier, vol. 54(C).
    2. Yang, Zeyu & Zhuo, Jiayi & Zhang, Yuqian, 2024. "Risk management and optimal investment with inalienable human capital," Finance Research Letters, Elsevier, vol. 61(C).
    3. Braun, Matias & Riutort, Julio & Roche, Hervé, 2024. "Hedge fund fee structure and risk exposure," Economic Modelling, Elsevier, vol. 132(C).
    4. Congming Mu & Jingzhou Yan & Jinqiang Yang, 2023. "Robust risk choice under high-water mark contract," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 295-322, July.

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    More about this item

    Keywords

    High-water mark; Hedge fund; Risk taking; Jump risk; Portfolio choice;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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