This paper examines three alternative approaches to valuing real options: (1) the standard option pricing technique using "risk-neutral" probabilities; (2) the use of risk-adjusted discount rates; and (3) discounting certainty-equivalent values with a riskless discount rate. As suggested by the...

We investigate incentive effects of a typical hedge fund contract for a manager with power utility. With a one-year horizon, the manager displays risk taking that varies dramatically with fund value. We extend the model to multiple yearly evaluation periods and find that the manager's risk...

We examine the use of second-order stochastic dominance as both a way to measure performance and also as a technique for constructing portfolios. Using in-sample data, we construct portfolios such that their second-order stochastic dominance over a typical pension fund benchmark is most...

We model a firm’s value process controlled by a manager maximizing expected utility from restricted shares and employee stock options. The manager also dynamically controls allocation of his outside wealth. We explore interactions between those controls as he partially hedges his exposure to...

This paper investigates dynamically optimal risk-taking by an expected-utility maximizing manager of a hedge fund. We examine the effects of variations on a compensation structure that includes a percentage management fee, a performance incentive for exceeding a specified highwater mark, and...

Previous papers have argued that trading restrictions can result in a typical employee stock option having a subjective value (certainty equivalent value) that is substantially less than its Black-Scholes value. However, these analyses ignore the manager’s ability to (at least partially)...

Numerous hedge funds stop reporting to commercial databases each year. An issue for hedgefund performance estimation is: what delisting return to attribute to such funds? This would be particularly problematic if delisting returns are typically very different from continuing funds’ returns. In...