Topic: Dynamic Asset Allocation with Hidden Volatility

Speaker: Mark M. Westerfield, Associate Professor, University of Washington

Date: September 20th (Wednesday)

Time: 10:00-11:30am

Location: Building 4, Room 102

Language: English

Abstract:

We study a dynamic continuous-time principal-agent model with endogenous cash flow volatility. The principal supplies the agent with capital for investment, but the agent can misallocate capital for private benefit and has private control over both the volatility of the project and the size of the investment. The optimal contract can yield either overly-risky or overly-prudent project selection; it can be implemented as a time varying cost of capital in the form of a hurdle rate. Our model captures stylized facts about the use of hurdle rates in capital budgeting and helps reconcile mixed empirical evidence on risk choice and managerial compensation.

About the speaker:

Mark M. Westerfield is currently an Associate Professor at University of Washington. Prior to joining University of Washington, Dr. Westerfield has held positions as the Assistant Professor at University of Southern California. He received his B.S. degree in Mathematics and BA in Physics from the University of Chicago, and his Ph.D. degree in Economics from Massachusetts Institute of Technology. He has published in the leading academic journals in the field such as Journal of Finance, Journal of Financial Economics, Review of Financial Studies, and Management Science etc.