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Steven Shreve


Speaker: Steven Shreve
Title: Should Banks Escrow Traders' Bonuses?
Affiliation: Carnegie Mellon University
Date: Friday, March 3, 2017
Place and Time: Room 101, Love Building, 3:35-4:30 pm
Refreshments: Room 204, Love Building, 3:00 pm

Abstract. We consider the principal/agent problem of a bank deciding whether it is advantageous to escrow a trader's bonuses. The escrow model is the following. Each year a trader manages a portfolio for a bank. At the end of the year, based on the trader's performance, the bank pays a bonus into an escrow account. If he has not had a disasterous year, the trader can consume from the bonus paid the previous year. We ask whether this scheme is better for the bank than paying the bonus directly to the trader and permitting him to consume it immediately. Within each year the trader has a continuous-time stochastic optimal control problem, and the problem across years is an infinite-horizon discounted dynamic programming problem. Properly constructed, these problems admit solutions that are sufficiently explicit to reveal when it is to the bank's advantage to escrow, and when it is not. This is joint work with Jing Wang.