[FAM-news] this week's seminars

Sandra Trenovatz sandra at fam.tuwien.ac.at
Thu Mar 13 12:03:15 CET 2008

As this week there were no FAM-seminars, we are pleased to announce
the talk of Jaska Cvitanic within the lecture series of the VGSF.
One of the next guests of the VGSF is Tomas Björk, see also:
Best regards, Sandra Trenovatz (FAM-office)

Fr, 2008-03-14, 15:30-17:00
                 Vienna Institute of Finance (WU-H46),
                 1190, Heiligenstädter Strasse 46-48,
                 seminar room 1 (ground floor)

                 Jaska Cvitanic
                 California Institute of Technology

                 "Optimal Contract in Continuous Time"

Paper 1:
Optimal Contracts in Continuous-Time Models

In this paper we present a unified approach to solving contracting 
problems with full information in models driven by Brownian Motion. We 
apply the stochastic maximum principle to give necessary and sufficient 
conditions for contracts that implement the so-called first-best 
solution. The optimal contract is proportional to the difference between 
the underlying process controlled by the agent and a stochastic, 
state-contingent benchmark. Our methodology covers a number of 
frameworks considered in the existing literature. The main finance 
applications of this theory are optimal compensation of company 
executives and of portfolio managers.

Paper 2:
Optimal contracting with random time of payment and outside options

We consider continuous-time Principal-Agent problems in which the payoff 
is delivered at an optimal random time, in cases of moral hazard and/or 
adverse selection. The principal can design contracts of a simple form 
that induce the agent to ask for the payo® at the time of principal's 
choosing. The optimal time of payment depends on the agent's and the 
principal's outside options. In examples with CARA utilities, under 
specific "stationarity" conditions on the outside options, it is not 
optimal for the principal to give the agent the option to exercise the 
contract at a random time. However, in general, the optimal payment time 
is typically random. Examples of this include the following cases: the 
agent can be ¯red, after having been paid a severance payment, and then 
replaced by another agent; the agent and the principal have asymmetric 
beliefs on the return of the output. In the case of adverse selection, 
the agents of lower type exercise early, while the agents of higher type 
wait until the end. The methodology we use for the general theory is the 
stochastic maximum principle and its link to Forward-Backward Stochastic 
Differential Equations and their reflected version, appropriate for 
optimal stopping problems.

The papers to be presented can be downloaded from the VGSF website 

Professor Cvitanic will come to WU-H46 (Building of Vienna Institute of 
Finance) on Friday morning. Please contact professor Damir Filipovic 
(http://www.vif.ac.at/filipovic/) if you would like to arrange an 
individual meeting with him.

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