1,585 research outputs found
Continuous-Time Principal-Agent Problems under Partial Information (A Stochastic Control Approach)
No full textMoral hazard is a key issue in principal-agent literature. Examples lie in several aspects of real life, such as the worker's lack of effort when his/her conduct cannot be directly observed by the employer, and the principal's consequent need to motivate the agent to work as much as possible in his/her best interests. Another example is the relationship between voters and politicians, where elections serve as a disciplining mechanism to prevent rent-seeking behavior by unobserved public administrators. In this work we analyze such problems in a continuous-time setting with a model specification that draws from the classical consumption/investment à la Merton. Agents differ in competence, which is incompletely (but symmetrically) known by all players and learned over time by observing agent's performance. From a mathematical point of view, the analysis uses classical filtering techniques to re-formulate the problem within a complete information setting; then, relying on the dynamic programming principle and by using a guess-and-verify approach, explicit (at least to some extent) solutions are provided
Portfolio comparison with complete and partial observation for a hara investor
No full textWe investigate the problem of maximizing the expected utility
from terminal wealth of an HARA investor when the
market price of risk is described by an unobservable random
variable. We compute the optimal portfolios explicitly
and compare them with the ones corresponding to the full
observation case
Learning and Portfolio Decisions for CRRA Investors
No full textWe maximize the expected utility from terminal wealth for a Constant Relative Risk Aversion (CRRA) investor when the market price of risk is an unobservable random variable and explore the effects of learning by comparing the optimal portfolio under partial observation with the corresponding myopic policy. In particular, we show that, for a market price of risk constant in sign, the ratio between the portfolio under partial observation and its myopic counterpart increases with respect to risk tolerance. As a consequence, the absolute value of the partial observation case is larger (smaller) than the myopic one if the investor is more (less) risk tolerant than the logarithmic investor. Moreover, our explicit computations enable to study in detail the so called hedging demand induced by parameter uncertainty
Portfolio optimization under partial information and cara preferences
No full textWe consider the problem of maximizing the expected utility
from terminal wealth in the case of CARA preferences and
when the mean return rate of the stock is an unknown nitestate
random variable. We reduce the problem within a
complete observation setting and then, by means of dynamic
programming techniques, we explicitly solve it and compare
the optimal policy with the one relative to the complete
observation case
Welfare effects of information and rationality in portfolio decisions under parameter uncertainty
No full textWe analyze and quantify, in a financial market with parameter uncertainty and for a Constant Relative Risk Aversion investor, the utility effects of two different boundedly rational (i.e., sub-optimal) investment strategies (namely, myopic and unconditional strategies) and compare them between each other and with the utility effect of full information. We show that effects are mainly caused by full information and predictability, being the effect of learning marginal. We also investigate the saver's decision of whether to manage her/his portfolio personally (DIY investor) or hire, against the payment of a management fee, a professional investor and find that delegation is mainly motivated by the belief that professional advisors are, depending on investment horizon and risk aversion, either better informed ("insiders") or more capable of gathering and processing information rather than their ability of learning from financial data. In particular, for very short investment horizons, delegation is primarily, if not exclusively, motivated by the beliefs that professional investors are better informed
Essays in Information Economics
No full textQuesta tesi è una raccolta di tre articoli riguardanti l’economia dell’informazione. Il primo articolo riguarda i possibili effetti negativi delle elezioni sul benessere degli elettori. Infatti, il controllo ottimo nei confronti di un politico dipende in modo non banale dalla relazione tra effetto disciplinante, effetto di selezione e effetto di riduzione della rendita. Il risultato è che un eccessivo controllo nei confronti di un politico può ridurre il benessere sociale. Il secondo articolo analizza un modello di competizione elettorale nel quale l’abilità del politico è sconosciuta anche al politico stesso oltre che agli elettori. L’analisi è in tempo continuo e sviluppata mediante tecniche di programmazione dinamica e di filtraggio. Le credenze sull’abilità vengono aggiornate secondo la regola di Bayes tramite l’osservazione del processo diffusivo che descrive il valore del settore pubblico. Il politico trae utilità da una rendita che è però inferiore in presenza di una scadenza elettorale. Il terzo articolo descrive una relazione principale-agente in tempo continuo dove l’output è rappresentato da un processo diffusivo il cui drift è determinato dallo sforzo dell’agente, che il principale non osserva, e dall’abilità dell’agente, che non è osservata nemmeno dall’agente stesso. Vengono analizzati sia gli incentivi espliciti dati dal contratto che gli incentivi impliciti legati ai career-concerns. L’analisi è sviluppata in tempo continuo; vengono applicate tecniche di programmazione dinamica e di filtraggio.This thesis is a collection of three essays about information economics. The first essay studies the possible negative effects of elections on voters’ welfare. In fact, the optimal control of politicians depends on the interplay of disciplining, selection and rent-shrinking effects in a non-trivial way. We show that too much control on the politician may reduce social welfare. The second essay studies an agency model of electoral competition where the incumbent’s ability is unknown to the voters as well as to the politician herself. The analysis is developed in a continuous-time stochastic framework using dynamic programming techniques. Competence is unobservable to everyone and learned over time in a Bayesian fashion through the observation of the value of the public sector. Politicians can divert resources being in office thus reducing the economy wealth but this rent is lower (all other things the same) with an electoral constraint. The third essay describes a continuous-time principal-agent model in which the output is a diffusion process whose drift is determined by the agent’s unobserved effort and by manager’s competence (it is assumed symmetric information about it). We study separately both explicit incentives arising from the contract and implicit incentives arising from career concerns.. All the analysis is developed in a continuous-time stochastic framework; we apply dynamic programming and filtering techniques
The role of taxation in an integrated economic-environmental model: a dynamical analysis
No full textWe propose a model with economic and environmental domains that interact with each other. The economic sphere is described by a Solow growth model, in which productivity is not exogenous but negatively affected by the stock of pollution that stems from the production process. A regulator can charge a tax on production, and the resources collected from taxation are used to reduce pollution. The resulting model consists of a two dimensional discrete dynamical system, and we study the role of taxation from both a static and a dynamical point of view. The focus is on the determination of the conditions under which taxation has a positive effect on the environment and leads to economic growth. Moreover, we show that a suitable environmental policy can allow recovering both local and global stability of the steady states. On the contrary, we show that, if the policy is not adequate, the system can exhibit endogenous oscillating and chaotic behavior and multistability phenomena
Stochastic dividend discount model: covariance of random stock prices
No full textThe price of common stocks, defined as the sum of all future discounted dividends, is at the heart of both the dividend discount models (DDM) and the stochastic DDM (SDDM). Gordon and Shapiro (Manag Sci 3:102–110 1956) assume a deterministic and constant dividends’ growth rate, whereas Hurley and Johnson (Financ Anal J 4:50–54 1994, J Portf Manag 25(1)27–31 1998) and Yao (J Portf Manag 23(4)99–103 1997) introduce randomness by letting the growth rate be a finite-state random variable and random dividends behave in a Markovian fashion. In this second case expected stock price is determined, but what if higher-order moments are needed? In order to address a number of financial topics, the present contribution presents an explicit formula for the covariance between (possibly) correlated stock prices
Use of copulas for Value-at-Risk calculation and backtesting with an application to italian data
No full textThis article shows how the application of copulas to real financial data allows to capture and replicate non-linear links between stochastic returns. This is an important approach in risk management because it is surely more appropriate than traditional linear correlation indicators when analyzing random phenomena in financial markets turmoil
Political Accountability: A Stochastic Control Approach
No full textWe study a political agency model with career concerns in a two-period continuous time stochastic framework where politicians differ on their competence in managing public sector. Competence is unobserved and learnt over time in a Bayesian fashion through the observation of the economy wealth. Citizens are expected utility maximizers and vote at the end of the first period for the incumbent or a challenger randomly chosen among the population depending on the amount of the public wealth delivered by the former. The incumbent politician chooses the extent of public intervention in the economy and a rent-seeking behaviour which reduces the economy wealth and is not observed by voters (moral hazard). According to traditional literature, we find support for the idea that elections lead politicians to be opportunistically more aligned with voters' preferences
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