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Asset management with endogenous withdrawals under a drawdown constraint

Hervé Roche

Quantitative Finance, 2019, vol. 19, issue 2, 289-312

Abstract: Asset preservation is a major concern for foundations that are hostile to large wealth downfalls. Implications for optimal consumption and investment policies are explored in a dynamic setting where wealth is restrained from falling below a fraction of its all-time high. Risky investment regulates wealth growth and mitigates the ratchet effect of the constraint, and may decrease as wealth approaches its maximum. The correspondence found between habit formation over consumption and wealth ratcheting provides a rational explanation for the proliferation of capital protection oriented funds.

Date: 2019
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