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Lifetime Consumption Portfolio Choice Under Trading Constraints Recursive Preferences And Nontradeable Income
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Book Synopsis Lifetime Consumption-Portfolio Choice Under Trading Constraints, Recursive Preferences and Nontradeable Income by : Mark D. Schroder
Download or read book Lifetime Consumption-Portfolio Choice Under Trading Constraints, Recursive Preferences and Nontradeable Income written by Mark D. Schroder and published by . This book was released on 2003 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider the lifetime consumption-portfolio problem in a competitive securities market with essentially arbitrary continuous price dynamics, a possibly nontradeable income stream, and convex constraints on the vector of market values of financial positions. (The setting extends Schroder and Skiadas, 2002, where the endowment is assumed tradeable and constraints are imposed in terms of wealth proportions.) For any utility function with a supergradient density, we develop the first-order conditions of optimality, a side-product being the characterization of a constrained notion of state-pricing. The methodology is applied to generalized continuous-time recursive utility, allowing for first and second-order risk-aversion that can depend on the risk source, reflecting the source's quot;ambiguity.quot; Within this class, we isolate a more tractable formulation in which preferences exhibit no wealth effects (an example being time-additive expected discounted exponential utility), and there is unrestricted trading in a money market and a suitably defined consol bond. In this case, we derive closed-form solutions for the optimal consumption and trading strategy in terms of the solution to a single constrained backward stochastic differential equation (BSDE), which in a Markovian setting maps to a PDE. Methodologically, we develop the utility gradient approach, but for the wealth-invariant case we also verify the solution using the dynamic programming approach, without having to assume a Markovian structure. Finally, we present a class of parametric examples in which the PDE characterizing the solution simplifies to a system of ordinary differential equations (of the Riccati type).
Book Synopsis Optimal Lifetime Consumption-Portfolio Strategies Under Trading Constraints and Generalized Recursive Preferences by : Mark D. Schroder
Download or read book Optimal Lifetime Consumption-Portfolio Strategies Under Trading Constraints and Generalized Recursive Preferences written by Mark D. Schroder and published by . This book was released on 2006 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider the lifetime consumption-portfolio problem in a competitive securities market with essentially arbitrary continuous price dynamics, and convex trading constraints (e.g., incomplete markets and short-sale constraints). Abstract first-order conditions of optimality are derived, based on a preference-independent notion of constrained state pricing. For homothetic generalized recursive utility, we derive closed-form solutions for the optimal consumption and trading strategy in terms of the solution to a single constrained BSDE. Incomplete market solutions are related to complete markets solutions with modified risk aversion towards non-marketed risk. Methodologically, we develop the utility gradient approach, but for the homothetic case we also verify the solution using the dynamic programming approach, without having to assume a Markovian structure. Finally, we present a class of parametric examples in which the BSDE characterizing the solution reduces to a system of Riccati equations.
Book Synopsis Advanced Financial Modelling by : Hansjörg Albrecher
Download or read book Advanced Financial Modelling written by Hansjörg Albrecher and published by Walter de Gruyter. This book was released on 2009 with total page 465 pages. Available in PDF, EPUB and Kindle. Book excerpt: Annotation This book is a collection of state-of-the-art surveys on various topics in mathematical finance, with an emphasis on recent modelling and computational approaches. The volume is related to a a ~Special Semester on Stochastics with Emphasis on Financea (TM) that took place from September to December 2008 at the Johann Radon Institute for Computational and Applied Mathematics of the Austrian Academy of Sciences in Linz, Austria
Book Synopsis Asset Pricing Theory by : Costis Skiadas
Download or read book Asset Pricing Theory written by Costis Skiadas and published by Princeton University Press. This book was released on 2009-02-09 with total page 363 pages. Available in PDF, EPUB and Kindle. Book excerpt: Asset Pricing Theory is an advanced textbook for doctoral students and researchers that offers a modern introduction to the theoretical and methodological foundations of competitive asset pricing. Costis Skiadas develops in depth the fundamentals of arbitrage pricing, mean-variance analysis, equilibrium pricing, and optimal consumption/portfolio choice in discrete settings, but with emphasis on geometric and martingale methods that facilitate an effortless transition to the more advanced continuous-time theory. Among the book's many innovations are its use of recursive utility as the benchmark representation of dynamic preferences, and an associated theory of equilibrium pricing and optimal portfolio choice that goes beyond the existing literature. Asset Pricing Theory is complete with extensive exercises at the end of every chapter and comprehensive mathematical appendixes, making this book a self-contained resource for graduate students and academic researchers, as well as mathematically sophisticated practitioners seeking a deeper understanding of concepts and methods on which practical models are built. Covers in depth the modern theoretical foundations of competitive asset pricing and consumption/portfolio choice Uses recursive utility as the benchmark preference representation in dynamic settings Sets the foundations for advanced modeling using geometric arguments and martingale methodology Features self-contained mathematical appendixes Includes extensive end-of-chapter exercises
Book Synopsis Advanced Asset Pricing Theory by : Ma Chenghu
Download or read book Advanced Asset Pricing Theory written by Ma Chenghu and published by World Scientific Publishing Company. This book was released on 2011-01-03 with total page 816 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides a broad introduction of modern asset pricing theory with equal treatments for both discrete-time and continuous-time modeling. Both the no-arbitrage and the general equilibrium approaches of asset pricing theory are treated coherently within the general equilibrium framework.The analyses and coverage are up to date, comprehensive and in-depth. Topics include microeconomic foundation of asset pricing theory, the no-arbitrage principle and fundamental theorem, risk measurement and risk management, sequential portfolio choice, equity premium decomposition, option pricing, bond pricing and term structure of interest rates. The merits and limitations are expounded with respect to allocation and information market efficiency, along with the classical expectations hypothesis concerning the information content of yield curve and bond prices. Efforts are also made towards the resolution of several well-documented puzzles in empirical finance, which include the equity premium puzzle, the risk free rate puzzle, and the money-ness bias phenomenon of Black-Scholes option pricing model.The theory is self-contained and unified in presentation. The inclusion of proofs and derivations to enhance the transparency of the underlying arguments and conditions for the validity of the economic theory makes an ideal advanced textbook or reference book for graduate students specializing in financial economics and quantitative finance. The explanations are detailed enough to capture the interest of those curious readers, and complete enough to provide necessary background material needed to explore further the subject and research literature.
Book Synopsis Handbook of Computational Economics by : Karl Schmedders
Download or read book Handbook of Computational Economics written by Karl Schmedders and published by Newnes. This book was released on 2013-12-31 with total page 680 pages. Available in PDF, EPUB and Kindle. Book excerpt: Handbook of Computational Economics summarizes recent advances in economic thought, revealing some of the potential offered by modern computational methods. With computational power increasing in hardware and algorithms, many economists are closing the gap between economic practice and the frontiers of computational mathematics. In their efforts to accelerate the incorporation of computational power into mainstream research, contributors to this volume update the improvements in algorithms that have sharpened econometric tools, solution methods for dynamic optimization and equilibrium models, and applications to public finance, macroeconomics, and auctions. They also cover the switch to massive parallelism in the creation of more powerful computers, with advances in the development of high-power and high-throughput computing. Much more can be done to expand the value of computational modeling in economics. In conjunction with volume one (1996) and volume two (2006), this volume offers a remarkable picture of the recent development of economics as a science as well as an exciting preview of its future potential. Samples different styles and approaches, reflecting the breadth of computational economics as practiced today Focuses on problems with few well-developed solutions in the literature of other disciplines Emphasizes the potential for increasing the value of computational modeling in economics
Book Synopsis Lifetime Investment and Consumption with Recursive Preferences and Small Transaction Costs by : Yaroslav Melnyk
Download or read book Lifetime Investment and Consumption with Recursive Preferences and Small Transaction Costs written by Yaroslav Melnyk and published by . This book was released on 2017 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: This article investigates the effects of small proportional transaction costs on lifetime consumption and portfolio decisions. The extant literature has focused on agents with additive utility; here, we argue that this is essentially without loss of generality at the leading order for small costs. To shed light on the effects of alternative risk preferences, we in turn perform a higher-order analysis for the archetype of non-additive preferences - the isoelastic recursive utilities proposed by Epstein and Zin.
Book Synopsis Consumption and Portfolio Choice Over the Life Cycle by : o F. Cocco
Download or read book Consumption and Portfolio Choice Over the Life Cycle written by o F. Cocco and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This article solves a realistically calibrated life cycle model of consumption and portfolio choice with non-tradable labor income and borrowing constraints. Since labor income substitutes for riskless asset holdings, the optimal share invested in equities is roughly decreasing over life. We compute a measure of the importance of human capital for investment behavior. We find that ignoring labor income generates large utility costs, while the cost of ignoring only its risk is an order of magnitude smaller, except when we allow for a disastrous labor income shock. Moreover, we study the implications of introducing endogenous borrowing constraints in this incomplete-markets setting.
Book Synopsis Time Non-separable Utility in Life-cycle Consumption and Portfolio Choice by : Joseph P. Lupton
Download or read book Time Non-separable Utility in Life-cycle Consumption and Portfolio Choice written by Joseph P. Lupton and published by . This book was released on 2002 with total page 394 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Consumption-portfolio Choice with Preferences for Cash by : Holger Kraft
Download or read book Consumption-portfolio Choice with Preferences for Cash written by Holger Kraft and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies a consumption-portfolio problem where money enters the agent's utility function. We solve the corresponding Hamilton-Jacobi-Bellman equation and provide closed-form solutions for the optimal consumption and portfolio strategy both in an infinite- and finite-horizon setting. For the infinite-horizon problem, the optimal stock demand is one particular root of a polynomial. In the finite-horizon case, the optimal stock demand is given by the inverse of the solution to an ordinary differential equation that can be solved explicitly. We also prove verification results showing that the solution to the Bellman equation is indeed the value function of the problem. From an economic point of view, we find that in the finite-horizon case the optimal stock demand is typically decreasing in age, which is in line with rules of thumb given by financial advisers and also with recent empirical evidence.
Book Synopsis Portfolio Choice with Internal Habit Formation by : Francisco Gomes
Download or read book Portfolio Choice with Internal Habit Formation written by Francisco Gomes and published by . This book was released on 2008 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: Motivated by the success of internal habit formation preferences in explaining asset pricing puzzles, we introduce these preferences in a life-cycle model of consumption and portfolio choice with liquidity constraints, undiversifiable labor income risk and stock-market participation costs. In contrast to the initial motivation, we find that the model is not able to simultaneously match two very important stylized facts: A low stock market participation rate, and moderate equity holdings for those households that do invest in stocks. Habit formation increases wealth accumulation because the intertemporal consumption smoothing motive is stronger. As a result, households start participating in the stock market very early in life, and invest their portfolios almost fully in stocks. Therefore, we conclude that, with respect to its ability to match the empirical evidence on asset allocation behavior, the internal habit formation model is dominated by its time-separable utility counterpart.
Book Synopsis Life-Cycle Portfolio Choice with Additive Habit Formation Preferences and Uninsurable Labor Income Risk by : Valery Polkovnichenko
Download or read book Life-Cycle Portfolio Choice with Additive Habit Formation Preferences and Uninsurable Labor Income Risk written by Valery Polkovnichenko and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This article explores the implications of additive and endogenous habit formation preferences in the context of a life-cycle model of an investor who has stochastic uninsurable labor income. To solve the model, I analytically derive the habit-wealth feasibility constraints and show that they depend on the worst possible path of future labor income and on the habit strength, but not on the probability of the worst income. When there is only a slim chance of a severe income shock, the model implies much more conservative portfolios. The model also predicts that for some low to moderately wealthy households, the portfolio share allocated to stocks increases with wealth. Because of this feature, the model can generate more conservative portfolios for younger than for middle-aged households. The effects of habits on portfolio choice are robust to income smoothing through borrowing or flexible labor supply. One controversial finding is that for high values of the habit strength parameter, usually required for the resolution of asset pricing puzzles in general equilibrium, the life-cycle model predicts counterfactually high wealth accumulation. (JEL: G11, G12).
Book Synopsis Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets by : George Chacko
Download or read book Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets written by George Chacko and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the optimal consumption and portfolio-choice problem of long-horizon investors who have access to a riskless asset with constant return and a risky asset (quot;stocksquot;) with constant expected return and time-varying precision-the reciprocal of volatility. Markets are incomplete, and investors have recursive preferences defined over intermediate consumption. The paper obtains a solution to this problem which is exact for investors with unit elasticity of intertemporal substitution of consumption and approximate otherwise. The optimal portfolio demand for stocks includes an intertemporal hedging component that is negative when investors have coefficients of relative risk aversion larger than one, and the instantaneous correlation between volatility and stock returns is negative, as typically estimated from stock return data. Our estimates of the joint process for stock returns and precision (or volatility) using U.S. data confirm this finding. But we also find that stock return volatility does not appear to be variable and persistent enough to generate large intertemporal hedging demands.
Book Synopsis Time-Varying Margin Requirements and Optimal Portfolio Choice by : Oleg Rytchkov
Download or read book Time-Varying Margin Requirements and Optimal Portfolio Choice written by Oleg Rytchkov and published by . This book was released on 2016 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the optimal consumption and portfolio problem of an investor with recursive preferences who is subject to time-varying margin requirements. The level of the requirements at each moment is determined by contemporaneous volatility of returns, which is stochastic and may have jumps. I show that nonstandard hedging demand produced by margin requirements increases with their persistence and volatility. However, for realistic values of parameters the hedging demand is small even in the presence of jumps and contemporaneous jumps in prices have a much stronger effect on optimal portfolio than jumps in constraints.
Book Synopsis Portfolio Choice with Internal Habit Formation by : Francisco J. Gomes
Download or read book Portfolio Choice with Internal Habit Formation written by Francisco J. Gomes and published by . This book was released on 2003 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Portfolio and Consumption Choice with Stochastic Investment Opportunities and Habit Formation in Preferences by : Claus Munk
Download or read book Portfolio and Consumption Choice with Stochastic Investment Opportunities and Habit Formation in Preferences written by Claus Munk and published by . This book was released on 2002 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the dynamic consumption and portfolio choice of an investor who has habit formation in preferences and access to a complete financial market. For general, possibly non-Markov, dynamics of market prices, we provide an exact characterization of the optimal behavior in terms of two relatively simple and intuitively interpretable stochastic processes. We study in more detail the optimal strategies in two concrete examples of time-varying investment opportunities. Firstly, we derive a closed-form solution of the optimal consumption and portfolio choice with mean-reverting stock returns. Secondly, with Cox-Ingersoll-Ross interest rate dynamics we can express the optimal strategies in terms of the solution to a partial differential equation, which has an explicit solution for time-additive preferences, but not with habit formation. Our numerical examples show that, while hedging demands for various assets are affected differently by habit persistence, the main effect on relative asset allocations stems from the fact that some assets (bonds and cash) are better investment objects than others (stocks) when it comes to ensuring that future consumption will not fall below the habit level. The implications of habit persistence in models with labor income are also addressed.
Book Synopsis Robust Portfolio Choice and Consumption with Derivative Trading Under Stochastic Volatility and Jumps by : Pengyu Wei
Download or read book Robust Portfolio Choice and Consumption with Derivative Trading Under Stochastic Volatility and Jumps written by Pengyu Wei and published by . This book was released on 2018 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the optimal consumption and portfolio choice problem for an ambiguity averse investor who has access to the stock and derivatives markets with recursive preferences. The stock process follows a stochastic volatility jump-diffusion model and the investor can have different levels of ambiguity about diffusion risks and the jump risk, respectively. We obtain an analytical solution which is exact when the investor has unit elasticity of intertemporal substitution of consumption, and approximate otherwise. We find that optimal exposures to diffusion risks and to the jump risk are significantly affected by the ambiguity aversion about the corresponding risk factors in the complete market. However, the optimal stock investment is insensitive to the ambiguity aversion about the jump risk in the incomplete market. We also find that considering ambiguity aversion with respect to diffusion risks and participating in the derivatives markets are essential to reduce the potential welfare loss, while the impact of ignoring the jump ambiguity is negligible.
