Abstract
This paper develops a continuous-time model to study the widely used investment mandates in the institutional asset management industry. In this paper, just like He and Xiong (2013), we suppose that the asset management industry has a two-layered incentive structure, and fund families charging investors fixed management fees while compensating individual fund managers based on fund performance. Different from He and Xiong (2013), we suppose that the fund family aims to select an optimal incentive strategy to maximize its terminal benefits, while the fund manager needs to select the optimal effort level and the optimal investment portfolio to maximize his terminal net discounted compensation in a continuous-time model. By using dynamic programming principle and stochastic differential game theory, the optimal strategies and value functions of both sides are derived. At last, numerical studies are provided to illustrate the effects of all the parameters on the optimal strategies. The result reveals that the optimal incentive mechanism will redistribute both the benefit of the fund families and the cost of the fund managers’ effort.
Highlights
Since professional cooperation plays an important role in making a successful investment, most investors handover their money to security companies, fund companies, or other financial management institutions, and the study of the asset management problem has attracted more and more attention
In the internal of fund management companies, investment decisions are usually made by the fund manager, and the performance of investment portfolio is closely related to the investment strategy and the fund manager’s effort level
We focus on the effects of parameters on the optimal effort level
Summary
Since professional cooperation plays an important role in making a successful investment, most investors handover their money to security companies, fund companies, or other financial management institutions, and the study of the asset management problem has attracted more and more attention. Since the model in our paper is different from that in [20] and the method used in [20] does not work anymore, we use the stochastic differential game theory to get the optimal strategies of both the fund family and the fund manager. E fund family aims to select an optimal incentive strategy to maximize its terminal gains, while the fund manager needs to select the optimal effort level and the optimal investment portfolio to maximize his terminal net discounted compensation. The fund manager needs to look for the optimal effort level and the optimal investment portfolio to maximize his terminal net discounted compensation (wage or dividend). Suppose it is risk neutral, the objective of the fund family is to maximize
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