We show that benchmark-linked convex incentives can lead risk-averse money managers aware of mispricing to over-invest in overpriced securities. In the model, the managers' risk-seeking behavior varies in response to the interaction of mispricing with convexity and benchmarking concerns....

We conduct a controlled laboratory experiment in which subjects dynamically choose to allocate their portfolio between (i) a safe asset, (ii) a risky asset and (iii) a skewed asset with negative expected value (a “bet”), in an environment where they can sometimes choose to acquire some...

We show that the intensity of "keeping up with the Joneses" behavior is largely determined by the extent to which a community is socially connected. Using a unique dataset on car purchases in Southern California, we find that social influence intensifies in suburban communities in which...

We show that a possible explanation for the widespread use of options in compensation contracts might be that they provide a way to screen executives. In particular, we consider the problem of a risk-neutral firm that tries to hire a risk-averse executive. There are several types of executives,...

We introduce a model that captures the main properties that characterize employee stock options (ESO), in particular, the likelihood of early voluntary exercise and the obligation to exercise immediately if the employee leaves the firm, except if this happens before options are vested, in which...

We propose the use of a new option which we call quadratic, and that central banks could use to smooth exchange rate volatility through the hedging strategies of the issuers. We derive analytic pricing and hedging formulas. We suggest a criterion to derive the optimal (for the Central Bank)...

For the first time in the literature, we derive an analytic expression for the representative agent of a fairly general class of economies populated by agents with catching up with the Joneses preferences, but with heterogeneous risk-aversion. As Chan and Kogan (2002) show numerically, the...

The finance literature documents a relation between labor income and the cross-section of stock returns. One possible explanation for this is the hedging decisions of investors with relative wealth concerns. This implies a negative risk premium associated with stock returns correlated with local...

In this paper we consider the equilibrium effects of an institutional investor whose performance is benchmarked to an index. In a partial equilibrium setting, the objective of the institutional investor is modeled as the maximization of expected utility (an increasing and concave function, in...