Portfolio choice and mortality-contingent claims: The general HARA case
AbstractWe solve a portfolio choice problem that includes mortality-contingent claims and labor income under general HARA preferences. Our contribution beyond existing literature is to (i) focus on the covariance between shocks to human capital and financial capital, to (ii) model the utility of a family with basic needs and (iii) include life insurance and pension annuity claims in one unified life-cycle model. Our solution employs a "similarity reduction" mapping which reduces the two-dimensional HJB equation into one dimension. This allows for the implementation of a quick numerical scheme. And, when shocks to human capital and financial capital are perfectly correlated, a closed-form expression is obtained as a special case.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 32 (2008)
Issue (Month): 11 (November)
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Web page: http://www.elsevier.com/locate/jbf
Insurance Annuities Finite difference method Hamilton-Jacobi-Bellman;
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