Utility maximization with periodic evaluations

Seminar in Insurance and Economics

SPEAKER: Harry Zheng (Imperial College London).

TITLE: Utility maximization with periodic evaluations.

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. (Joint work with Alex S.L. Tse.)

Link to Seminar in Insurance and Economics.