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A Wealth-Dependent Investment Opportunity Set: Its Effect on Optimal Consumption and Portfolio Decisions

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Author Info

  • Sungsub Choi

    (Department of Mathematics, Pohang University of Science and Technology)

  • Hyeng Keun Koo

    () (School of Business Administration, Ajou University)

  • Gyoocheol Shim

    (Department of Mathematics, Pohang University of Science and Technology)

  • Thaleia Zariphopoulou

    (Department of Mathematics, University of Texas at Austin)

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    Abstract

    We consider a consumption and investment problem where an investor¡¯s investment opportunity gets enlarged when she becomes rich enough, i.e., when her wealth touches a critical level. We derive optimal consumption and investment rules assuming that the investor has a time-separable von Neumann-Morgenstern utility function. An interesting feature of optimal rules is that the investor consumes less and takes more risk in risky assets if the investor expects that she will have a better investment opportunity when her wealth reaches a critical level.

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    Bibliographic Info

    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 4 (2003)
    Issue (Month): 2 (November)
    Pages: 427-469

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    Handle: RePEc:cuf:journl:y:2003:v:4:i:2:p:427-469

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    Related research

    Keywords: Consumption; Investment; Utility function; Brownian motion; Optimal strategy; Investment opportunity; Critical wealth level;

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    1. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
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