Optimal Stopping of Active Portfolio Management

Kyoung Choi (), Hyeng Koo () and Do Kwak ()
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Kyoung Choi: Department of Mathematics, KAIST, Korea Advanced Institute of Science and Technology
Hyeng Koo: School of Business Administration, Ajou University
Do Kwak: Department of Mathematics, KAIST

Annals of Economics and Finance, 2004, vol. 5, issue 1, 93-126

Abstract: We study an investor¡¯s decision to switch from active portfolio management to passive management. This problem is mathematically modelled by a mixture of a consumption-portfolio selection problem and an optimal stopping problem. We assume that the investor has stochastic differential utility with ambiguity aversion and incurs utility loss from active portfolio management that can be avoided by switching to passive management, and show that she manages actively as long as her level of wealth is above a certain threshold. The threshold wealth level is shown to be an increasing function of both the coefficient of ambiguity aversion and the utility cost of active management.

Keywords: Consumption-portfolio selection; Active management; Passive management; Discretionary stopping time; Recursive utility; Stochastic differential utility; Optimal switching; Ambiguity (search for similar items in EconPapers)
JEL-codes: C61 D81 G11 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2004:v:5:i:1:p:93-126

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