Pandemic portfolio choice

Holger Kraft and Farina Weiss

European Journal of Operational Research, 2023, vol. 305, issue 1, 451-462

Abstract: COVID-19 has taught us that a pandemic can significantly increase biometric risk and at the same time trigger crashes of the stock market. Taking these potential co-movements of financial and non-financial risks into account, we study the portfolio problem of an agent who is aware that a future pandemic can affect her health and personal finances. The corresponding stochastic dynamic optimization problem is complex: It is characterized by a system of Hamilton-Jacobi-Bellman equations which are coupled with optimality conditions that are only given implicitly. We prove that the agent’s value function and optimal policies are determined by the unique global solution to a system of non-linear ordinary differential equations. We show that the optimal portfolio strategy is significantly affected by the mere threat of a potential pandemic.

Keywords: Dynamic programming; Existence and uniqueness; Verification theorem; Portfolio theory; Recursive utility (search for similar items in EconPapers)
JEL-codes: C61 D15 D52 G11 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:305:y:2023:i:1:p:451-462

DOI: 10.1016/j.ejor.2022.05.035

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