The relaxed investor and parameter uncertainty

Leonard C G Rogers

Finance and Stochastics, 2001, vol. 5, issue 2, pages 131-154

Abstract: We firstly consider an investor faced with the classical Merton problem of optimal investment in a log-Brownian asset and a fixed-interest bond, but constrained only to change portfolio (and, if relevant, consumption) choices at times which are a multiple of h. We show that the cost of this constraint can be well described by a power series expansion in h, the first few terms of which we determine explicitly. Typically, this cost is not too large. We then compare this with the cost of parameter uncertainty, as modelled by supposing that the rate of return on the share has a prior Gaussian distribution. We find that the effect of parameter uncertainty is typically bigger than the effects of infrequent policy review.

Keywords: Merton consumption problem; Merton investment problem; time lag; parameter uncertainty (search for similar items in EconPapers)
JEL-codes: C61 D81 D90 G11 (search for similar items in EconPapers)
Date: 2001-04-10
Note: received: November 1999; final version received: June 2000
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