Dynamic Asset Allocation with Ambiguous Return Predictability

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.

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.

We develop an approximate solution method for the optimal consumption and portfolio choice problem of an infinitely long-lived investor with Epstein–Zin utility who faces a set of asset returns described by a vector autoregression in returns and state variables. Empirical estimates in long-run annual and post-war quarterly U.S. data suggest that the predictability of stock returns greatly increases the optimal demand for stocks. The role of nominal bonds in long-term portfolios depends on the importance of real interest rate risk relative to other sources of risk. Long-term inflation-indexed bonds greatly increase the utility of conservative investors.

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

Dynamic portfolio choice under ambiguity and regime switching mean returns

Optimal investment, consumption and life insurance purchase with learning about return predictability

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.

Canner, Mankiw and Weil (1997) point out that the popular financial advisors on portfolio allocation among cash, bonds and stocks appear not to follow the mutual-fund separation theorem and call the inconsistency between separation theorem and popular financial advice ”an asset allocation puzzle.” For solving the asset allocation puzzle, we provide an analysis of the optimal dynamic asset allocation strategy for a long-horizon investor who has nontraded assets under an economic environment with stochastic investment opportunities and incomplete financial markets. We propose another distinguishing hedging component of the dynamic asset allocation for the stock index fund: the human capital hedging component, the hedging demand which characterizes the demand arising from the desire to hedge against changes in the labor income in contrast to Merton (1973). When we incorporate nontraded assets with intertemporal hedging, we can solve the asset allocation puzzle successfully.

Hedging Demands, Imperfect Information, and Incomplete Markets

The question how to optimize consumption and portfolio choice over the life cycle has been widely discussed in the literature so far. In this paper we concentrate on a retiree's optimal consumption and portfolio selection over his remaining years of life. We apply the logistic model of mortality thus modeling the empirically observed increase of mortality during the retirement period. The optimal consumption strategy and portfolio choice are established by reducing the Hamilton-Jacobi-Bellmann equation to the explicit solution of an ordinary differential function (ODF) that includes the mortality rate. A general finding is that the Merton-Samuelson result of constant portfolio choice for a constant mortality is confirmed for arbitrary mortality. The portfolio choice is only influenced by risk and return of assets and the retirees’ risk aversion. To get the specific optimal consumption strategy in a realistic situation the logistic model of mortality has been fitted to the data of the Statistical Yearbook for the Federal Republic of Germany 2006/2008. The optimal initial value for the ODF is obtained by numerical methods. The solution provides a large increase in the ratio of optimal consumption to wealth up to about 92 years followed by a sharp decrease. A bequest motive dampens the magnitudes of the ups and downs of the consumption ratio but does not change the basic shape.

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

: Securities business activities are understood as the activities of organizations, individuals, securities companies, stock brokers and other intermediary financial institutions in the stock market to perform operations. Securities trading aims to make a profit. A common task in portfolio management is to find the optimal investment portfolio according to the return and risk approach, that is, for the same level of risk, portfolio whose highest return gives is the optimal investment portfolio. Similarly, corresponding to the same predetermined rate of return, the portfolio with the lowest level of risk is the optimal investment portfolio. There are several popular data analysis tools today, including Python. This article will demonstrate the application of Python tools in data analysis to determine optimal stock investment portfolios.

Healthcare and Consumption with Aging

This study investigates whether the influence of financial expertise on stock investors’ ability to predict risk and return is contingent on the length of the forecast horizon. In a quasi-experimental design, stock market professionals (N1=63, N2=36), private shareholders (N1=155, N2=172) and students (N1=124, N2=90) twice provided their short- (3-month) and long-term (2-year) risk and return predictions on stock indices. The results show that in general, experts did not outperform students or private shareholders in their return predictions. However, the level of financial expertise positively influenced the accuracy of risk predictions. An interaction effect between financial expertise and the length of the forecast horizon suggests that more knowledgeable and experienced investors performed better in the long term compared to the short term than inexperienced investors did