2024/06/01 by Yang Liu, Liu, Yang, Zhenyu Shen +1
Decision Sciences · Economics, Econometrics and Finance · Mathematics · Psychology · #91B16 #91G10 #Compensation (psychology) #Convex analysis #Convex optimization #Econometrics #Economic theories and models #Economics #Expected utility hypothesis #FOS: Economics and business #FOS: Mathematics #Mathematical Finance (q-fin.MF) #Mathematical economics #Mathematics #Monotone polygon #Optimization and Control (math.OC) #Psychology #Regular polygon #Risk and Portfolio Optimization #Risk aversion (psychology) #Social psychology
paper · pdf · doi:10.48550/arxiv.2406.00435
published in arXiv (Cornell University) (Cornell University)
openalex publication_date 2024/06/01 · openalex created_date 2024/06/06 · openalex updated_date 2026/07/28
In hedge funds, convex compensation schemes are adopted to stimulate a high-profit performance for portfolio managers. In economics, non-monotone risk aversion is proposed to argue that individuals may not be risk-averse when the wealth level is low. Combining these two ingredients, we study the optimal control strategy of the manager in incomplete markets. Generally, we propose a wide family of utility functions, the piecewise symmetric asymptotic hyperbolic absolute risk aversion (PSAHARA) utility, to model the two ingredients, containing both non-concavity and non-differentiability as some abnormalities. Technically, we propose an additional assumption and prove concavification techniques of non--concave utility functions with a left unbounded domain in incomplete markets. Next, we derive an explicit optimal control for the family of PSAHARA utilities. This control is expressed into a unified four-term structure, featuring the asymptotic Merton term. Furthermore, we provide a detailed asymptotic analysis and numerical illustration of the optimal portfolio. We obtain several key insights, including that the convex compensation still induces a great risk-taking behavior in the case that the preference is modeled by SAHARA utility. Finally, we conduct a real-data analysis of the U.S. stock market under the above model and conclude that the PSAHARA portfolio is very risk-seeking and leads to a high return and a high volatility.