IDEAS home Printed from https://ideas.repec.org/a/inm/oropre/v71y2023i6p2078-2091.html
   My bibliography  Save this article

Portfolio Selection, Periodic Evaluations and Risk Taking

Author

Listed:
  • Alex S. L. Tse

    (Department of Mathematics, University College London, London WC1H 0AY, United Kingdom)

  • Harry Zheng

    (Department of Mathematics, Imperial College London, London SW7 2AZ, United Kingdom)

Abstract

We present a continuous-time portfolio selection problem faced by an agent with S-shaped preference who maximizes the utilities derived from the portfolio’s periodic performance over an infinite horizon. The periodic reward structure creates subtle incentive distortion. In some cases, local risk aversion is induced, which discourages the agent from risk taking in the extreme bad states of the world. In some other cases, eventual ruin of the portfolio is inevitable, and the agent underinvests in the good states of the world to manipulate the basis of subsequent performance evaluations. We outline several important elements of incentive design to contain the long-term portfolio risk.

Suggested Citation

  • Alex S. L. Tse & Harry Zheng, 2023. "Portfolio Selection, Periodic Evaluations and Risk Taking," Operations Research, INFORMS, vol. 71(6), pages 2078-2091, November.
    • Handle: RePEc:inm:oropre:v:71:y:2023:i:6:p:2078-2091
    DOI: 10.1287/opre.2021.0780
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/opre.2021.0780
    Download Restriction: no
    File URL: https://libkey.io/10.1287/opre.2021.0780?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:oropre:v:71:y:2023:i:6:p:2078-2091. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.