 Consumption-portfolio choice with preferences for cashHolger Kraft and Farina Weiss Journal of Economic Dynamics and Control, 2019, vol. 98, issue C, 40-59 Abstract: 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. Our results are robust to introducing recursive utility. Keywords: Consumption-portfolio choice; Money in the utility function; Stock demand; Stochastic control; Recursive utility (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:98:y:2019:i:c:p:40-59 DOI: 10.1016/j.jedc.2018.09.006 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.