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Optimal consumption and sale strategies for a risk averse agent
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Hobson, David G. and Zhu, Yeqi (2016) Optimal consumption and sale strategies for a risk averse agent. SIAM Journal on Financial Mathematics, 7 (1). pp. 674-719. doi:10.1137/140982738 ISSN 1945-497X .
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Official URL: http://dx.doi.org/10.1137/140982738
Abstract
In this article we consider a special case of an optimal consumption/optimal portfolio problem first studied by Constantinides and Magill and by Davis and Norman, in which an agent with constant relative risk aversion seeks to maximise expected discounted utility of consumption over the infinite horizon, in a model comprising a risk-free asset and a risky asset with proportional transaction costs. The special case that we consider is that the cost of purchases of the risky asset is infinite, or equivalently the risky asset can only be sold and not bought.
In this special setting new solution techniques are available, and we can make considerable progress towards an analytical solution. This means we are able to consider the comparative statics of the problem. There are some surprising conclusions, such as consumption rates are not monotone increasing in the return of the asset, nor are the certainty equivalent values of the risky positions monotone in the risk aversion.
Item Type: | Journal Article | ||||||
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Subjects: | H Social Sciences > HG Finance | ||||||
Divisions: | Faculty of Science, Engineering and Medicine > Science > Statistics | ||||||
Library of Congress Subject Headings (LCSH): | Portfolio management -- Mathematical models, Securities, Risk | ||||||
Journal or Publication Title: | SIAM Journal on Financial Mathematics | ||||||
Publisher: | Society for Industrial and Applied Mathematics | ||||||
ISSN: | 1945-497X | ||||||
Official Date: | 27 September 2016 | ||||||
Dates: |
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Volume: | 7 | ||||||
Number: | 1 | ||||||
Page Range: | pp. 674-719 | ||||||
DOI: | 10.1137/140982738 | ||||||
Status: | Peer Reviewed | ||||||
Publication Status: | Published | ||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||
Date of first compliant deposit: | 17 June 2016 | ||||||
Date of first compliant Open Access: | 26 April 2017 |
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