A multivariate model of strategic asset allocation

We study the Bellman equation associated with the optimal consumption and portfolio choice problem with stopping times in a complete market. We establish the existence of a strong solution by using the viscosity solutions technique. The optimal policy is shown to exist from the optimality conditions in the variational inequality.

Dynamic Asset Allocation with Ambiguous Return Predictability

Optimal Annuity Risk Management

This paper studies an optimal consumption and portfolio choice problem for unemployed people who have an option to work. Our problem is to find optimal consumption, risky investment, and workforce re-entry strategies for the unemployed. We find a closed form of the critical wealth level to re-enter the workforce. We show that the unemployed with a higher disutility of labor or a larger relative risk aversion are more reluctant to re-enter the workforce.

According to conventional wisdom, long-term bonds are appropriate for conservative long-term investors. This paper develops a model of optimal consumption and portfolio choice for infinite-lived investors with recursive utility who face stochastic interest rates, solves the model using an approximate analytical method, and evaluates conventional wisdom. As risk aversion increases, the myopic component of risky asset demand disappears but the intertemporal hedging component does not. Conservative investors hold assets to hedge the risk that real interest rates will decline. Long-term inflation-indexed bonds are most suitable for this purpose, but nominal bonds may also be used if inflation risk is low. (JEL G12)

An optimal consumption, investment and voluntary retirement choice problem with disutility and subsistence consumption constraints: A dynamic programming approach

Optimal investment, consumption and retirement choice problem with disutility and subsistence consumption constraints

We develop a preference-based model for dynamic asset allocation in an international diversified portfolio, subjecting to a home country event, using stochastic information filtering The model is formulated by maximizing the expected utility of the investor's terminal wealth, which is expressed as a function of the ratio of standard deviation on foreign asset returns to the standard deviation on home asset returns. The model test results illustrate that home bias holds in the absence of home event risk. It has also revealed that when there is a home event risk, the ratio of standard deviations on both asset returns and the percentage jump size exhibit a deterministic asset weights pattern. In addition, we observed that when a severe political issue or an economic event occurs, the home investors decrease the proportion of home asset while increase the proportion of foreign asset. This foreign bias trend arises when the home event risk information is imperfectly spilled over to foreign assets.

Multi-period stochastic optimization models for dynamic asset allocation

Chapter 13 - Stochastic programming models for strategic and tactical asset allocation—A study from Norwegian life insurance

Hedging Demands, Imperfect Information, and Incomplete Markets

Unemployment Risks and Private Unemployment Insurance

Strategic Asset Allocation in Stochastic Environment and Incomplete Markets: Evidence on Horizon and Hedging Effects

In this article it is displayed how a model for asset allocation which reproduces the judgement-making process of an expert (via concepts based on fuzzy logic) can be individualised and extended in order to adapt it to the judgement-making process of other experts. Here, even after wide-ranging changes and additions, the advantages of the fuzzy approach remain, which consist of its flexibility, its realistic reproduction of expert knowledge and the comprehensibility of its results. In order to clarify the procedure, typical adaptation and extension requests for an asset allocation model are presented. The steps towards their implementation are shown on an application which was developed under the expert supervision of a leading international capital investment company. The composition of the examples shown is based on experiences from several presentations in which the model was presented to various financial service providers.

This thesis consists of three essays in financial economics, more precisely in the field of asset pricing and optimal portfolio choice. The first essay studies the asset pricing implications of heterogeneity in preferences coupled with long run risk in a dynamic general equilibrium pure exchange economy. It is concerned with the understanding of how risk sharing among different types of agents affects the assets returns moments in equilibrium and moreover, how these agents reacts dynamically to the long run risk that they perceive. The second and third essay approach the question of optimal portfolio with stochastic opportunity sets. The second essay proposes an approximation methodology for deriving approximate closed form solutions of dynamic optimal portfolio allocation problems. The third essay examines the optimal consumption, portfolio rule and life insurance purchase problem of a wage earner having uncertain lifetime when the market price of risk follows a mean-reverting stochastic process.