A numerical approach to solve consumption-portfolio problems with predictability in income, stock prices, and house prices

Farina Weiss ()
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Farina Weiss: Goethe University

Mathematical Methods of Operations Research, 2021, vol. 93, issue 1, No 2, 33-81

Abstract: Abstract In this paper, I establish a numerical method to solve a generic consumption-portfolio choice problem with predictability in stock prices, house prices, and labor income. I generalize the SAMS method introduced by Bick et al. (Manag Sci 59:485–503, 2013) to state-dependent modifiers. I set up artificial markets to derive closed-form solutions for my life-cycle problem and transform the resulting consumption-portfolio strategies into feasible ones in the true market. To obtain transformed-feasible strategies that are close to the truly, unknown optimal strategies, I introduce state-dependent modifiers. I show that this generalization of the SAMS method reduces the welfare losses from over 10% to less than 2%.

Keywords: Continuous-time Optimization; Hamiltion–Jacobi–Bellman equation; Optimal consumption and investment; Predictability; Intertemporal hedging (search for similar items in EconPapers)
JEL-codes: D14 D91 G11 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s00186-020-00727-5

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