Economics at your fingertips  

Optimization of consumption with labor income

Nicole El Karoui and Monique Jeanblanc-Picqué
Additional contact information
Nicole El Karoui: Laboratoire de Probabilités, Université Pierre et Marie Curie, 4, place Jussieu, F-75252 Paris Cedex 05, France
Monique Jeanblanc-Picqué: Equipe d'Analyse et Probabilités, Université d'Evry, Boulevard des Coquibus, F-91025 Evry Cedex, France Manuscript

Finance and Stochastics, 1998, vol. 2, issue 4, 409-440

Abstract: We present the solution of a portfolio optimization problem for an economic agent endowed with a stochastic insurable stream, under a liquidity constraint over the time interval [0,T]. Generally, the existence of labor income complicates the agent's decisions. Moreover, in the real world the economic agents are restricted in their ability to borrow against their future labor income. We deal with this kind of liquidity constraint following the lines of American option valuation which allows us to give a precise characterization of the optimal consumption as well as the terminal wealth. In a Markovian case, with infinite horizon and HARA utility, we obtain a closed form solution.

Keywords: Portfolio optimization; labor income; American option; optimal stopping problem (search for similar items in EconPapers)
Date: 1998-07-27
Note: received: December 1996; final version received: August 1997
References: Add references at CitEc
Citations: View citations in EconPapers (42) Track citations by RSS feed

Downloads: (external link) (application/pdf) ... 02004/ (application/postscript)
Access to the full text of the articles in this series is restricted

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:

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla ().

Page updated 2019-11-06
Handle: RePEc:spr:finsto:v:2:y:1998:i:4:p:409-440