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Optimal Consumption and Investment with a Wealth-Dependent Time-Varying Investment Opportunity

Author

Listed:
  • Gyoocheol Shim

    (Department of Financial Engineering, Ajou University)

  • Hyeng Keun Koo

    (Department of Financial Engineering, Ajou University)

Abstract

We study an optimization problem of an investor in which there is a better investment opportunity when he is rich than when he is poor. We model the betterment of the investment opportunity by considering an exogenously spec- ified wealth threshold such that the investor’s investment opportunity is better when his wealth is above the threshold than when it is below the threshold. We derive a closed form solution for the optimal consumption and investment strategies by using a dynamic programming method, and investigate the effects of the potential investment opportunity changes on the optimal strategies.

Suggested Citation

  • Gyoocheol Shim & Hyeng Keun Koo, 2015. "Optimal Consumption and Investment with a Wealth-Dependent Time-Varying Investment Opportunity," Annals of Economics and Finance, Society for AEF, vol. 16(1), pages 19-42, May.
    • Handle: RePEc:cuf:journl:y:2015:v:16:i:1:shim
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    More about this item

    Keywords

    Consumption; Investment; Investment opportunity set; Threshold wealth level; Bellman equation;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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