The relaxed investor and parameter uncertainty

L.C.G. Rogers ()
Additional contact information
L.C.G. Rogers: University of Bath, Department of Mathematical Sciences, Bath BA2 7AY, UK Manuscript

Finance and Stochastics, 2001, vol. 5, issue 2, 154 pages

Abstract: We firstly consider an investor faced with the classical Merton problem of optimal investment in a log-Brownian asset and a fixed-interest bond, but constrained only to change portfolio (and, if relevant, consumption) choices at times which are a multiple of h. We show that the cost of this constraint can be well described by a power series expansion in h, the first few terms of which we determine explicitly. Typically, this cost is not too large. We then compare this with the cost of parameter uncertainty, as modelled by supposing that the rate of return on the share has a prior Gaussian distribution. We find that the effect of parameter uncertainty is typically bigger than the effects of infrequent policy review.

Keywords: Merton consumption problem; Merton investment problem; time lag; parameter uncertainty (search for similar items in EconPapers)
JEL-codes: C61 D81 D90 G11 (search for similar items in EconPapers)
Date: 2001-04-10
Note: received: November 1999; final version received: June 2000
References: Add references at CitEc
Citations: View citations in EconPapers (60)

Downloads: (external link)
http://link.springer.de/link/service/journals/00780/papers/1005002/10050131.pdf (application/pdf)
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: https://EconPapers.repec.org/RePEc:spr:finsto:v:5:y:2001:i:2:p:131-154

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 () and Springer Nature Abstracting and Indexing ().