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Mutual fund theorems when minimizing the probability of lifetime ruin

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  • Bayraktar, Erhan
  • Young, Virginia R.

Abstract

We show that the mutual fund theorems of Merton [1971. Journal of Economic Theory 3, 373-413] extend to the problem of optimal investment to minimize the probability of lifetime ruin. We obtain two such theorems by considering a financial market both with and without a riskless asset for random consumption. The striking result is that we obtain two-fund theorems despite the additional source of randomness from consumption.

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Bibliographic Info

Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 5 (2008)
Issue (Month): 2 (June)
Pages: 69-78

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Handle: RePEc:eee:finlet:v:5:y:2008:i:2:p:69-78

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Web page: http://www.elsevier.com/locate/frl

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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, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
  3. Erhan Bayraktar & Virginia R. Young, 2007. "Correspondence between Lifetime Minimum Wealth and Utility of Consumption," Papers math/0703820, arXiv.org.
  4. Erhan Bayraktar & Virginia R. Young, 2007. "Minimizing the Probability of Lifetime Ruin under Borrowing Constraints," Papers math/0703850, arXiv.org.
  5. Duffie, Darrell & Fleming, Wendell & Soner, H. Mete & Zariphopoulou, Thaleia, 1997. "Hedging in incomplete markets with HARA utility," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 753-782, May.
  6. Martin Kulldorff & Ajay Khanna, 1999. "A generalization of the mutual fund theorem," Finance and Stochastics, Springer, vol. 3(2), pages 167-185.
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