ambiguous volatility and asset pricing in continuous time we formulate a model of utility for a continuous time framework that captures aversion to ambiguity about both volatility and drift corresponding extensions of some basic results in asset pricing theory are presented first we derive arbitrage free pricing rules based on hedging arguments because ambiguous volatility implies market incompleteness hedging arguments determine prices only up to intervals in order to obtain sharper predictions we apply the model of utility to a representative agent endowment economy and study equilibrium asset returns a version of the consumption capital asset pricing model is derived and the effects of ambiguous volatility are described the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

delegated portfolio management abstract a problem of screening agents with privately known forecasting abilities and reservation utilities and then eliciting truthful information from these agents once they are employed is considered for the case of risk averse agents and large principals an approximately optimal solution is constructively characterized under the assumption that payoffs are normally distributed a significant extension of the definnetti savage probability elicitation result is developed under this extension knowledge of agent preferences is not required when the underlying conditional distributions are symmetric and this fact is exploited to solve the screening problem in a mean variance formulation

asset prices and institutional investors empirical evidence indicates that trades by institutional investors have sizable effects on asset prices generating phenomena such as index effects asset class effects and others it is difficult to explain such phenomena within standard representative agent asset pricing models in this paper we consider an economy populated by institutional investors alongside standard retail investors institutions care about their performance relative to a certain index our framework is tractable admitting exact closed form expressions and produces the following analytical results we find that institutions optimally tilt their portfolios towards stocks that comprise their benchmark index the resulting price pressure boosts index stocks while leaving nonindex stocks unaffected by demanding a higher fraction of risky stocks than retail investors institutions amplify the index stock volatilities and aggregate stock market volatility and give rise to countercyclical sharpe ratios trades by institutions induce excess correlations among stocks that belong to their benchmark index generating an asset class effect institutions finance their additional purchases of index stocks by taking on leverage a policy prescription that calls for a reduction in leverage while reducing the riskiness of institutional portfolios would also reduce the ability of institutions to tilt their portfolios towards index stocks depressing the index level

moral hazard in dynamic risk management we consider a contracting problem in which a principal hires an agent to manage a risky project when the agent chooses volatility components of the output process and the principal observes the output continuously the principal can compute the quadratic variation of the output but not the individual components this leads to moral hazard with respect to the risk choices of the agent to find the optimal contract we develop a novel approach to solving principal agent problems first we identify a family of admissible contracts for which the optimal agent s action is explicitly characterized then we show that we do not lose on generality when finding the optimal contract inside this family up to integrability conditions to do this we use the recent theory of singular changes of measures for ito processes we solve the problem in the case of cara preferences and show that the optimal contract is linear in these factors the contractible sources of risk including the output the quadratic variation of the output and the cross variations between the output and the contractible risk sources thus like sample sharpe ratios used in practice path dependent contracts naturally arise when there is moral hazard with respect to risk management in a numerical example we show that the loss of efficiency can be significant if the principal does not use the quadratic variation component of the optimal contract

an analysis of congestion measures and heterogeneous angler preferences in a random utility model of recreational fishing the potential importance ofcongestion effects on the management andrationing of recreational facilities andservices in the presence of heterogeneouspreferences were highlighted nearly twenty fiveyears ago by freeman and haveman 1977 whilethere have been a number of theoretical modelsextending and expanding upon this work mcconnell 1988 anderson 1993 empiricalresearch evaluating such impacts is limited evidence of the potential impacts of congestionon resource usage is of obvious importance especially for natural resource managers whounderstand that congestion can be an effectiverationing device and because users likelydiffer in both their preferences for use andaversion to congestion it is the objective ofthis research to compare alternative measuresof congestion for explaining site choice withina random utility modeling framework thecongestion measures differ with respect to thetime horizon over which they are assumed to beformulated and the measure of central tendencyused to represent them furthermore weinvestigate how the response to thesecongestion measures may differ across twodistinct angler types and the implications ofthose differences on the per trip willingnessto pay for stock enhancement

foreign aid and economic growth an econometric study of bangladesh bangladesh is one of the poorest countries in the world since independence in 1971 bangladesh has received a large inflow of foreign capital from various countries for rapid economic progress bangladesh thus provides a test case for examining the effectiveness of foreign capital in promoting economic growth focussing on the supply side of the economy an econometric model is developed to quantify the effects of foreign aid and its various components on economic growth the model is tested using available time series data on bangladesh from 1972 to 1988 keeping data limitations measurement problems and other econometric problems in mind the empirical results indicate the domestic resources exert a stronger impact on growth than foreign resources foreign resources in its highly aggregative form do not show any significant contribution to growth however its decomposition into various components show that loans are more effective than grants and food aid is more effective than commodity or period

foreign aid and economic growth in cameroon cameroon is classified as a lower middle income country since it became a unified and independent country in 1961 cameroon has received significant amounts of foreign aid most of it from france and the european economic community since the 1960s economic growth in the country has been quite significant between 1965 and 1980 the gross domestic product grew at an average annual rate of 5 1 and at a rate of 2 3 between 1980 and 1990 cameroon seems a good test case for determining the effects of foreign aid on economic growth in developing countries an econometric model based on the neoclassical production function is developed and used to test the relationship between foreign aid and eonomic growth the model is tested using time series datd on the country from 1971 to 1990 the results show that domestic resources have a stronger impact on economic growth in cameroon than foreign resources these results however must be taken with the understanding that the data suffer from measurement probl

optimal security design and dynamic capital structure in a continuous time agency model we derive the optimal dynamic contract in a continuous time principal agent setting and implement it with a capital structure credit line long term debt and equity over which the agent controls the payout policy while the project s volatility and liquidation cost have little impact on the firm s total debt capacity they increase the use of credit versus debt leverage is nonstationary and declines with past profitability the firm may hold a compensating cash balance while borrowing at a higher rate through the credit line surprisingly the usual conflicts between debt and equity asset substitution strategic default need not arise in this paper we consider a dynamic contracting environment in which a riskneutral agent or entrepreneur with limited resources manages an investment activity while the investment is profitable it is also risky and in the short run it can generate arbitrarily large operating losses the agent will need outside financial support to cover such losses and continue the project the difficulty is that while the probability distribution of the cash flows is publicly known the agent may distort these cash flows by taking a hidden action that leads to a private benefit specifically the agent may i conceal and divert cash flows for his own consumption and or ii stop providing costly effort which would reduce the mean of the cash flows therefore from the perspective of the principal or investors that fund the project there is the concern that a low cash flow realization may be a result of the agent s actions rather than the project s fundamentals to provide the agent with appropriate incentives investors control the agent s wage and may also withdraw their financial support for the project and force its early termination we seek to characterize an optimal contract in this framework and relate it to the firm s choice of capital structure we develop a method to solve for the optimal contract given the incentive constraints in a continuous time setting and study the properties of the credit line debt and equity that implement the contract as in the discrete time model of demarzo and fishman 2003 the continuous time setting offers several peter m demarzo is from stanford university and yuliy sannikov is from u c berkeley we

dynamic resource allocation with hidden volatility abstract we study a firm s internal resource allocation using a dynamic principal agent model with endogenous cash flow volatility the principal supplies the agent with resources for productive use but the agent has private control over both project volatility and resource intensity and may misallocate resources to obtain private benefits the optimal contract can yield either overly risky or overly prudent project selection it can be implemented with a constant pricing schedule i e a static decentralized linear mechanism giving the agent control over the resource quantities project risk and agent s equity share the implementation rationalizes the use of hurdle rates above a firm s cost of capital and transfer prices above marginal cost while showing that hurdle rates or transfer prices may not vary with the agent s risk choice

measuring investment performance in a rational expectations equilibrium model much research has been concerned with evaluating the performance of managed portfolios e g mutual funds and examining whether portfolio managers display in some sense superior performance superior performance would seemingly turn on the possession of superior information that is utilized in managing portfolios in general a fund s asset holdings or portfolio weights might not be observable to an outsider whether they are or not however they are likely to change over time this happens especially when better performance is a result of superior information since managers will change their portfolio composition on obtaining private information since such changes must be taken into account the problem of measuring performance of managed portfolios is inherently different from that of evaluating the performance of individual assets groups of assets or generally portfolios with constant and known composition

dynamics of contract design with screening we analyze a novel principal agent problem of moral hazard and adverse selection in continuous time the constant private shock revealed at time 0 when the agent selects the contract has a long term impact on the optimal contract the latter is based not only on the continuation value of the agent who truthfully reports but is also contingent upon the continuation value of the agent who misreports called the temptation value the good agent is retired when the temptation value of the bad agent becomes large because then it is expensive to motivate the good agent the bad agent is retired when the temptation value of the good agent becomes small because then the future payment does not provide sufficient incentives we also compare the efficiency of the shutdown contract and the screening contract and find that the screening contract can bring more profit to the principal only when the agent s reservation utility is sufficiently small this paper was accepted by wei xiong finance

an equilibrium model of asset pricing and moral hazard this article develops an integrated model of asset pricing and moral hazard it is demonstrated that the expected dollar return of a stock is independent of managerial incentives and idiosyncratic risk but the equilibrium price of the stock depends on them thus the expected rate of return is affected by managerial incentives and idiosyncratic risk it is shown however that managerial incentives and idiosyncratic risk affect the expected rate of return through their influence on systematic risk rather than serve as independent risk factors it is also shown that the risk aversion of the principal in the model leads to less emphasis on relative performance evaluation than

aid the public sector and the market in less developed countries a reply the article in this journal by mosley et al i987 concludes its analysis of aid effectiveness as demonstrating inability of development aid over more than twenty years to provide a net increment to overall growth in the third world p 636 this note purports to show that this conclusion which is ostensibly distressing as the authors claim is not warranted the section of the study which is the basis of the conclusion cited and the subject of this note is a cross section regression analysis full details of which are shown in mosley et al table 3 the note is concerned with the relation between the dependent variable specified as the growth rate of real gdp per cent per annum hereafter gdp and aid specified as a percentage of gdp hereafter aid the aid results with only two significant positive coefficients in one subsample certainly give no basis for claiming aid effectiveness in terms of gdp growth the intention in this note is to interpret the results which are assumed to be valid this is made possible by the fact that the authors have helpfully provided the full input set of mean values derived from the raw data from this it is possible to calculate the gdp aid relationship for each country for the second and third period the procedure for deriving these relationships is as follows for each country the mean values of the time series of gdp and aid are extracted from the data for i 960 70 and for i 970 80 using i 960 70 as the base the signs of the change in the levels of the gdp and aid mean values between periods are recorded this is repeated for i980 4 with i970 80 mean values as the base the relationship between the two signs is an indication of the effect of aid on gdp in the period in which the change in levels is effected thus in the case of an increase in aid being combined with a decrease in gdp the latter must have fallen relatively to the former and aid effectiveness is negative mutatis mutandis for the other three sign combinations thus generating the appropriate gdp aid relationship for each country in each period a frequency distribution of the four sign combinations relating to the full sample is presented in table i since the signs of the changes in the levels of gdp and aid are derived by making explicit the arithmetic relationship implicit in the data they form a valid base from which to draw conclusions without requiring any test of

optimal risk sharing with effort and project choice we consider first best risk sharing problems in which the agent can control both the drift effort choice and the volatility of the underlying process project selection in a model of delegated portfolio management it is optimal to compensate the manager with an option type payoff where the functional form of the option is obtained as a solution to an ordinary differential equation in the general case the optimal contract is a fixed point of a functional that connects the agent s and the principal s maximization problems we apply martingale duality methods familiar from optimal consumption investment problems

equilibrium prices in the presence of delegated portfolio management abstract this paper analyzes the asset pricing implications of commonly used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a benchmark portfolio the contract parameters the extent of delegation and equilibrium prices are all determined endogenously within the model we consider symmetric fulcrum performance fees distort the allocation of managed portfolios in a way that induces a significant and unambiguous positive effect on the prices of the assets included in the benchmark and a negative effect on the sharpe ratios asymmetric performance fees have more complex effects on equilibrium prices and sharpe ratios with the signs of these effects fluctuating stochastically over time in response to variations in the funds excess performance

rent dissipation and efficient rationalization in for hire recreational fishing abstract recreational fisheries are increasingly important in fisheries management for some species recreational take rivals or exceeds the amount harvested by commercial fishermen most recreational fisheries are regulated with gear restrictions bag limits and time area closures but there is increasing interest in the market based solutions employed in commercial fisheries this despite the lack of an adequate bioeconomic theory of the joint commercial recreational aspects of many recreational fisheries this paper integrates a detailed production specification with traditional bioeconomic tools in order to better understand the implications of rationalization schemes targeted at the charter sector while confirming some of the qualitative conclusions of the commercial fisheries literature on open access and regulated open access our model also generates rich and novel predictions with respect to input choices the number of vessels and congestion externalities we devise a system of instruments that generate efficient outcomes and extensively discuss issues associated with their real world implementation

asset pricing under optimal contracts we consider the problem of finding equilibrium asset prices in a financial market in which a portfolio manager agent invests on behalf of an investor principal who compensates the manager with an optimal contract we extend a model from buffa vayanos and woolley 2014 by allowing general contracts and by allowing the portfolio manager to invest privately in individual risky assets or the index to alleviate the effect of moral hazard agent is optimally compensated by benchmarking to the index which however may incentivize him to be too much of a closet indexer to counter those incentives the optimal contract rewards agent for taking specific risk of individual assets in excess of the systematic risk of the index by rewarding the deviation between the portfolio return and the return of an index portfolio and the deviation s quadratic variation

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

growth in africa does the source of investment financing matter this paper examines empirical evidence for 11 sub saharan african countries on the relationship between economic growth and three principal sources of investment funds foreign aid foreign direct investment and domestic saving in light of the shortcomings of traditional cross section analyses the time series approach is used instead modern time series methods are rigorously applied beginning with unit root tests and followed by model specifications that reflect the revealed temporal behaviours of the variables in each of the 11 countries domestic saving seems to play a somewhat more important role in generating economic growth than foreign direct investment or foreign aid however the mixture of results across the 11 countries implies that in general it is not possible to rank one source of investment financing ahead of any other

does it all add up benchmarks and the compensation of active portfolio managers in this article the authors examine theoretically the use of benchmark portfolios in the compensation of privately informed portfolio managers they find that the use of a benchmark and particularly the types of benchmarks often observed in practice cannot be easily rationalized specifically commonly used benchmark adjusted compensation schemes are generally inconsistent with optimal risk sharing and do not lead to the choice of an optimal portfolio for the investor moreover benchmarks do not help in solving potential contracting problems such as inducing the manager to expend effort or trying to screen out uninformed managers copyright 1997 by university of chicago press

optimal contracts in a continuous time delegated portfolio management problem this article studies the contracting problem between an individual investor and a professional portfolio manager in a continuous time principal agent framework optimal contracts are obtained in closed form these contracts are of a symmetric form and suggest that a portfolio manager should receive a fixed fee a fraction of the total assets under management plus a bonus or a penalty depending upon the portfolio s excess return relative to a benchmark portfolio the appropriate benchmark portfolio is an active index that contains risky assets where the number of shares invested in each asset can vary over time rather than a passive index in which the number of shares invested in each asset remains constant over time fund managers compensation schemes in a delegated portfolio management setting have been of special interest to both academics and practitioners academic interest stems in part from the rapid growth of managed funds over the last two decades gompers and metrick 1998 report that by december 1996 mutual funds pension funds and other financial intermediaries held discretional control over more than half of the u s equity market it is thus of importance to study the impact of institutional trading on asset prices and to integrate into one model both asset pricing and delegated portfolio management compensation as advocated by brennan 1993 allen and santomero 1997 and allen 2001 it is also important to understand the relationship between a manager s trading strategies and his implicit incentives or career concerns see e g brown harlow and starks 1996 brown goetzmann and park 1997 chevalier and ellison 1999 and chen and pennacchi 2000 these concerns include internal promotion from a small to a large fund higher outside offers and the flow of money through the fund under management 1 the importance of fund manager compensation is also underscored by congressional passage in 1970 of the amendment to

a continuous time version of the principal agent problem this paper describes a new continuous time principal agent model in which the output is a diffusion process with drift determined by the agent s unobserved effort the risk averse agent receives consumption continuously the optimal contract based on the agent s continuation value as a state variable is computed by a new method using a differential equation during employment the output path stochastically drives the agent s continuation value until it reaches a point that triggers retirement quitting replacement or promotion the paper explores how the dynamics of the agent s wages and effort as well as the optimal mix of short term and long term incentives depend on the contractual environment the understanding of dynamic incentives is central in economics how do companies motivate their workers through piece rates bonuses and promotions how is income inequality connected with productivity investment and economic growth how do financial contracts and capital structure give incentives to the managers of a corporation the methods and results of this paper provide important insights to many such questions this paper introduces a continuous time principal agent model that focuses on the dynamic properties of optimal incentive provision we identify factors that make the agent s wages increase or decrease over time we examine the degree to which current and future outcomes motivate the agent we provide conditions under which the agent eventually reaches retirement in the optimal contract we also investigate how the costs of creating incentives and the dynamic properties of the optimal contract depend on the contractual environment the agent s outside options the difficulty of replacing the agent and the opportunities for promotion our new dynamic insights are possible due to the technical advantages of continuous time methods over the traditional discrete time ones continuous time leads to a much simpler computational procedure to find the optimal contract by solving an ordinary differential equation this equation highlights the factors that determine optimal consumption and effort the dynamics of the agent s career path are naturally described by the drift and volatility of the agent s pay offs the geometry of solutions to the differential equation allows for easy comparisons to see how the agent s wages effort and incentives depend on the contractual environment finally continuous time highlights many essential features of the optimal contract including the agent s eventual retirement in our benchmark model a risk averse agent is tied to a risk neutral principal forever after employment starts the agent influences output by his continuous unobservable effort input the principal sees only the output a brownian motion with a drift that depends on the agent s effort the agent dislikes effort and enjoys consumption we assume that the agent s utility function has the income effect that is as the agent s income increases it becomes costlier to compensate him for the effort also we assume that the agent s utility of consumption is bounded from below

the delegated lucas tree we analyze the effects of the observed increased share of delegated capital for trading strategies and equilibrium prices by introducing delegation into a standard lucas exchange economy in equilibrium some investors trade on their own account but others decide to delegate trading to professional fund managers flow performance incentive functions describe how much capital clients provide to funds at each date as a function of past performance convex flow performance relations imply that the average fund outperforms the market in recessions and underperforms in expansions when the share of capital that is delegated is low all funds follow the same strategy however when the equilibrium share of delegated capital is high funds with identical incentives employ heterogeneous trading strategies a group of managers borrows to take on a levered position on the stock thus fund returns are dispersed in the cross section and the outstanding amounts of borrowing and lending increase the relation between the share of delegated capital and the sharpe ratio typically follows an inverse u shaped pattern jel g11 g12 g23 d02 d81 over the past thirty years there has been a gradual but profound change in the way money is invested in financial markets while almost 50 of u s equities were held directly in 1980 by 2007 this proportion decreased to approximately 20 see french 2008 what are the equilibrium implications of this shift in particular how does the increased presence of delegation affect trading strategies and prices to analyze the link between the incentives of financial institutions and asset prices we introduce financial intermediaries into a lucas exchange economy rather than study an optimal contracting problem we rely on empirical regularities inflows and assume a convex relation betweenflows and performance relative to the market as documented for example in chevalier and ellison 1997

linearity with project selection and controllable diffusion rate in continuous time principal agent problems i extend holmstrom and milgrom s model by allowing the agent to control privately or publicly the diffusion rate process and show that the optimal contract is still linear i discuss the conditions under which conflicts over the choice of diffusion rate do and do not arise as an application i examine project selection problems of a firm conflicts between the manager and investors arise because giving the manager too much incentive to work to increase the profit from ongoing operations can induce him to be too conservative in project selection possibly resulting in optimal contracts with low sensitivities

toward a complete economic theory of the utilization and management of recreational fisheries abstract a model of individual behavior for recreational fisheries which considers both the participation decision and the activity level decision is developed the model also distinguishes between the catch rate which is a biologically determined parameter and the landings rate which is a control variable individual and fisherywide equilibria under open access are described for both homogeneous and heterogeneous participants optimal utilization is also described optimal utilization differs from open access in terms of activity levels of participants and number and type of participants regulations to achieve optimal utilization are described