Portfolio optimization models on infinite-time horizon

Portfolio optimization models on infinite-time horizon

0.00 Avg rating0 Votes
Article ID: iaor2005731
Country: Netherlands
Volume: 122
Issue: 3
Start Page Number: 573
End Page Number: 597
Publication Date: Sep 2004
Journal: Journal of Optimization Theory and Applications
Authors:
Keywords: portfolio selection
Abstract:

A portfolio optimization problem on an infinite-time horizon is considered. Risky asset prices obey a logarithmic Brownian motion and interest rates vary according to an ergodic Markov diffusion process. The goal is to choose optimal investment and consumption policies to maximize the infinite-horizon expected discounted hyperbolic absolute risk aversion (HARA) utility of consumption. The problem is then reduced to a one-dimensional stochastic control problem by virtue of the Girsanov transformation. A dynamic programming principle is used to derive the dynamic programming equation (DPE). The subsolution/supersolution method is used to obtain existence of solutions of the DPE. The solutions are then used to derive the optimal investment and consumption policies. In addition, for a special case, we obtain the results using the viscosity solution method.

Reviews

Required fields are marked *. Your email address will not be published.