A Wealth-Dependent Investment Opportunity Set: Its Effect on Optimal Consumption and Portfolio Decisions

Sungsub Choi, Hyeng Koo (), Gyoocheol Shim and Thaleia Zariphopoulou
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Sungsub Choi: Department of Mathematics, Pohang University of Science and Technology
Hyeng Koo: School of Business Administration, Ajou University
Gyoocheol Shim: Department of Mathematics, Pohang University of Science and Technology
Thaleia Zariphopoulou: Department of Mathematics, University of Texas at Austin

Annals of Economics and Finance, 2003, vol. 4, issue 2, 427-469

Abstract: We consider a consumption and investment problem where an investor¡¯s investment opportunity gets enlarged when she becomes rich enough, i.e., when her wealth touches a critical level. We derive optimal consumption and investment rules assuming that the investor has a time-separable von Neumann-Morgenstern utility function. An interesting feature of optimal rules is that the investor consumes less and takes more risk in risky assets if the investor expects that she will have a better investment opportunity when her wealth reaches a critical level.

Keywords: Consumption; Investment; Utility function; Brownian motion; Optimal strategy; Investment opportunity; Critical wealth level (search for similar items in EconPapers)
JEL-codes: E21 G11 (search for similar items in EconPapers)
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2003:v:4:i:2:p:427-469

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