 Simple explicit formula for near-optimal stochastic lifestylingAleš Černý and Igor Melicherčík European Journal of Operational Research, 2020, vol. 284, issue 2, 769-778 Abstract: In life-cycle economics, the Samuelson paradigm (Samuelson, 1969) states that the optimal investment is in constant proportions out of lifetime wealth composed of current savings and the present value of future income. It is well known that in the presence of credit constraints this paradigm no longer applies. Instead, optimal life-cycle investment gives rise to so-called stochastic lifestyling (Cairns, Blake, and Dowd, 2006), whereby for low levels of accumulated capital it is optimal to invest fully in stocks and then gradually switch to safer assets as the level of savings increases. In stochastic lifestyling not only does the ratio between risky and safe assets change but also the mix of risky assets varies over time. While the existing literature relies on complex numerical algorithms to quantify optimal lifestyling, the present paper provides a simple formula that captures the main essence of the lifestyling effect with remarkable accuracy. Keywords: Optimal investment; Stochastic lifestyling; Samuelson paradigm; Power utility; Stochastic optimal control (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:284:y:2020:i:2:p:769-778 DOI: 10.1016/j.ejor.2019.12.032 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.