Economics at your fingertips  

Consumption-portfolio choice with preferences for cash

Holger 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)
JEL-codes: G11 C61 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

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
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-01-12
Handle: RePEc:eee:dyncon:v:98:y:2019:i:c:p:40-59