Learn More
This paper characterizes differentiable subgame perfect equilibria in a continuous time intertemporal decision optimization problem with non-constant discounting. The equilibrium equation takes two different forms, one of which is reminescent of the classical Hamilton-Jacobi-Bellman equation of optimal control, but with a non-local term. We give a local(More)
The object of this paper is to study the mean–variance portfolio optimization in continuous time. Since this problem is time inconsistent we attack it by placing the problem within a game theoretic framework and look for subgame perfect Nash equilibrium strategies. This particular problem has already been studied in [2] where the authors assumed a constant(More)
We study a continuous-time principal-agent model in which a risk-neutral agent with limited liability must exert unobservable effort to reduce the likelihood of large but relatively infrequent losses. Firm size can be decreased at no cost, and increased subject to adjustment costs. In the optimal contract, investment takes place only if a long enough period(More)
We provide new insights that link compensation structure terms to credit spreads by modeling the dynamic risk choice of a risk-averse manager paid with performance insensitive pay (cash) and performance sensitive pay (stock). The model predicts that credit spreads are increasing in the ratio of cash-to-stock. When the manager is flexible to choose debt(More)
We derive a closed-form solution for the optimal portfolio of a non-myopic utility maximizer who has incomplete information about the " alphas, " or abnormal returns of risky securities We show that the hedging component induced by learning about the expected return can be a substantial part of the demand. Using our methodology, we perform an " ex ante "(More)
and the 2002 meetings of the Western Finance Association for useful suggestions. We are grateful to Xifeng Diao who provided expert research assistance and computational support. Abstract Employee stock options represent a significant potential source of dilution for shareholders in many firms. It is well known that reported earnings systematically(More)
We explore the various arguments for and against the recommendation that younger households should invest a larger share of their pension wealth in risky assets. The ability of young agents to compensate their financial losses by saving more during their career provides the strongest argument in favor of younger people investing more aggressively in the(More)
What percentage of their portfolio should investors allocate to hedge funds? The only available answers to the above question are set in a static mean-variance framework, with no explicit accounting for uncertainty on the active manager's ability to generate abnormal return, and usually generate unreasonably high allocations to hedge funds. In this paper,(More)