 Optimal investment and consumption when allowing terminal debtAn Chen and Michel Vellekoop European Journal of Operational Research, 2017, vol. 258, issue 1, 385-397 Abstract: We analyze a dynamic optimization problem which involves the consumption and investment of an investor with constant relative risk aversion for consumption but with a risk aversion for final wealth which does not necessarily imply that terminal wealth must always be positive. We require risk aversion for terminal wealth to be positive but not monotone: there is a point of maximal risk aversion at zero wealth and the investor may continue to consume when wealth is negative. Using dual optimization methods we can derive explicit solutions and we find that the optimal solution differs in a fundamental way from the case where risk aversion is monotone. It turns out that the optimal consumption function is convex and concave at different wealth levels and that the optimal investment strategy may no longer be monotone as a function of the remaining time to invest and consume. Keywords: Utility theory; Risk management; Dual approach in dynamic optimization (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:258:y:2017:i:1:p:385-397 DOI: 10.1016/j.ejor.2016.09.012 Access Statistics for this article European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati More articles in European Journal of Operational Research from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.