Risk Incentives in Financial Institutions and Financial Instability
The main objective of this research project is to develop a new framework for the study of the informational frictions that separate investors from sophisticated traders operating in complete markets. I plan to develop a model of...
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Descripción del proyecto
The main objective of this research project is to develop a new framework for the study of the informational frictions that separate investors from sophisticated traders operating in complete markets. I plan to develop a model of generalized risk-shifting, in which traders in complete markets can secretly take fair bets with any arbitrary distribution. The goal is to study the interplay of this generalized risk-shifting with traders’ career concerns. When investors learn about trading skills from observing traders’ realized returns, taking exposures on risk factors with rare adverse realizations may help a trader temporarily improve her reputation and attract more funds. The first intermediary step of this project consists in fully characterizing the payoff functions that lead a trader to gamble inefficiently in a one-period setting. The second step consists in solving for contracts that are risk-shifting-proof in a dynamic career concern environment. Finally, the model is well suited to be taken to hedge fund data