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Robust portfolios and weak incentives in long-run investments

Author

Listed:
  • Guasoni, Paolo
  • Muhle-Karbe, Johannes
  • Xing, Hao

Abstract

When the planning horizon is long, and the safe asset grows indefinitely, isoelastic portfolios are nearly optimal for investors who are close to isoelastic for high wealth, and not too risk averse for low wealth. We prove this result in a general arbitrage-free, frictionless, semimartingale model. As a consequence, optimal portfolios are robust to the perturbations in preferences induced by common option compensation schemes, and such incentives are weaker when their horizon is longer. Robust option incentives are possible, but require several, arbitrarily large exercise prices, and are not always convex.

Suggested Citation

  • Guasoni, Paolo & Muhle-Karbe, Johannes & Xing, Hao, 2017. "Robust portfolios and weak incentives in long-run investments," LSE Research Online Documents on Economics 60577, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:60577
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    File URL: http://eprints.lse.ac.uk/60577/
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    References listed on IDEAS

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    1. Korotkov, Vladimir & Wu, Desheng, 2021. "Benchmarking project portfolios using optimality thresholds," Omega, Elsevier, vol. 99(C).

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    More about this item

    Keywords

    long run; portfolio choice; incentives; executive compensation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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