This article investigates a fund manager's risk-taking incentives induced by an increasing and convex relationship of fund flows to relative performance. In a dynamic portfolio choice framework, we show that the ensuing convexities in the manager's objective give rise to a finite risk-shifting...

This article analyzes optimal, dynamic portfolio and wealth/consumption policies of utility maximizing investors who must also manage market-risk exposure using Value-at-Risk (VaR). We find that VaR risk managers often optimally choose a larger exposure to risky assets than non-risk managers and...

This paper analyzes optimal, dynamic portfolio and wealth/consumption policies of utility maximizing investors who must also manage market-risk exposure using a given risk-management model. We focus on the industry standard, the Value-at-Risk (VaR) based risk management, and find that VaR risk...

This article studies an economy with borrowers (firms or individuals) under costly default. Borrowers defaulting under adverse economic conditions may, despite incurring default costs, emerge as wealthier than nonborrowers. Asset substitution is generally not pronounced, although a larger risk...