Optimal Stopping of Active Portfolio Management
AbstractWe study an investor¡¯s decision to switch from active portfolio management to passive management. This problem is mathematically modelled by a mixture of a consumption-portfolio selection problem and an optimal stopping problem. We assume that the investor has stochastic differential utility with ambiguity aversion and incurs utility loss from active portfolio management that can be avoided by switching to passive management, and show that she manages actively as long as her level of wealth is above a certain threshold. The threshold wealth level is shown to be an increasing function of both the coefficient of ambiguity aversion and the utility cost of active management.
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Bibliographic InfoArticle provided by Society for AEF in its journal Annals of Economics and Finance.
Volume (Year): 5 (2004)
Issue (Month): 1 (May)
Consumption-portfolio selection; Active management; Passive management; Discretionary stopping time; Recursive utility; Stochastic differential utility; Optimal switching; Ambiguity;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
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