Optimal Consumption and Investment with a Wealth-Dependent Time-Varying Investment Opportunity

Gyoocheol Shim () and Hyeng Koo ()
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Gyoocheol Shim: Department of Financial Engineering, Ajou University
Hyeng Koo: Department of Financial Engineering, Ajou University

Annals of Economics and Finance, 2015, vol. 16, issue 1, 19-42

Abstract: We study an optimization problem of an investor in which there is a better investment opportunity when he is rich than when he is poor. We model the betterment of the investment opportunity by considering an exogenously spec- ified wealth threshold such that the investor’s investment opportunity is better when his wealth is above the threshold than when it is below the threshold. We derive a closed form solution for the optimal consumption and investment strategies by using a dynamic programming method, and investigate the effects of the potential investment opportunity changes on the optimal strategies.

Keywords: Consumption; Investment; Investment opportunity set; Threshold wealth level; Bellman equation (search for similar items in EconPapers)
JEL-codes: E21 G11 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2015:v:16:i:1:shim

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