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Pandemic portfolio choice

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  • Kraft, Holger
  • Weiss, Farina

Abstract

COVID-19 has taught us that a pandemic can significantly increase biometric risk and at the same time trigger crashes of the stock market. Taking these potential co-movements of financial and non-financial risks into account, we study the portfolio problem of an agent who is aware that a future pandemic can affect her health and personal finances. The corresponding stochastic dynamic optimization problem is complex: It is characterized by a system of Hamilton-Jacobi-Bellman equations which are coupled with optimality conditions that are only given implicitly. We prove that the agent’s value function and optimal policies are determined by the unique global solution to a system of non-linear ordinary differential equations. We show that the optimal portfolio strategy is significantly affected by the mere threat of a potential pandemic.

Suggested Citation

  • Kraft, Holger & Weiss, Farina, 2023. "Pandemic portfolio choice," European Journal of Operational Research, Elsevier, vol. 305(1), pages 451-462.
    • Handle: RePEc:eee:ejores:v:305:y:2023:i:1:p:451-462
    DOI: 10.1016/j.ejor.2022.05.035
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic programming; Existence and uniqueness; Verification theorem; Portfolio theory; Recursive utility;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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