Leverage management

Hefei Wang*, Chenyang Wang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

An asset manager trades off the benefits of higher leverage against the costs of adjusting leverage in order to mitigate expected insolvency losses. We calculate optimal dynamic incentive-compatible leverage policies in simple versions of this problem. We give explicit conditions under which the value functions remain finite and show that following the optimal trading strategy, the fund manager does not have strong incentives to realize the loss and sell the asset when the value of the asset drops, even though such sales may help the fund to avoid insolvency.

Original languageEnglish
Pages (from-to)161-183
Number of pages23
JournalMathematics and Financial Economics
Volume3
Issue number3
DOIs
Publication statusPublished - 2010
Externally publishedYes

Keywords

  • Leverage decision
  • Portfolio optimization
  • Transaction cost

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