We derive the optimal compensation contract in a principal-agent setting in which outcome is used to provide incentives for both effort and risky investments. To motivate investment, optimal compensation entails rewards for high as well as low outcomes, and it is increasing at the mean outcome...

type="main" <title type="main">ABSTRACT</title> <p>We derive the optimal compensation contract in a principal–agent setting in which outcome is used to provide incentives for both effort and risky investments. To motivate investment, optimal compensation entails rewards for high as well as low outcomes, and it is...</p>

We characterize the solution to the consumption and investment problem of a time-additive power utility investor in a continuous-time dynamically complete market with stochastic changes in the opportunity set. It is demonstrated that under stochastic interest rates the investor optimally hedges...

With constrained portfolios contingent claims do generally not have a unique price that rules out arbitrage opportunities. Earlier studies have demonstrated that, when there are no constraints on the hedge portfolio, a no-arbitrage price interval for any contingent claim exists. I consider the...

We study the consumption and investment choice of a price-taking utility-maximizing investor having access to trade in stocks and interest-rate dependent assets with a stochastically evolving term structure of interest rates. We derive explicit expressions for the optimal investment strategy of...

This paper generalizes the stochastic duration concept of Cox, Ingersoll, and Ross (1979) to multi-factor diffusion models of the term structure of interest rates. The stochastic duration has time as its unit and measures the sensitivity of the price of a bond (or portfolio of bonds) with...

We provide explicit solutions to life-cycle utility maximization problems involving dynamic decisions on investments in stocks and bonds, consumption of perishable goods, and the rental and the ownership of residential real estate. House prices, stock prices, interest rates, and the labor income...

The utility-maximizing consumption and investment strategy of an individual investor receiving an unspanned labor income stream seems impossible to find in closed form and very difficult to find using numerical solution techniques. We suggest an easy procedure for finding a specific, simple, and...

We characterize the solution to the consumption and investment problem of a power utility investor in a continuous-time dynamically complete market with stochastic changes in the opportunity set. Under stochastic interest rates the investor optimally hedges against changes in the term structure...

With constrained portfolios contingent claims do not generally have a unique price that rules out arbitrage opportunities. Earlier studies have demonstrated that when there are constraints on the hedge portfolio, a no-arbitrage price interval for any contingent claim exists. I consider the more...