The relaxed investor and parameter uncertainty
AbstractWe firstly consider an investor faced with the classical Merton problem of optimal investment in a log-Brownian asset and a fixed-interest bond, but constrained only to change portfolio (and, if relevant, consumption) choices at times which are a multiple of h. We show that the cost of this constraint can be well described by a power series expansion in h, the first few terms of which we determine explicitly. Typically, this cost is not too large. We then compare this with the cost of parameter uncertainty, as modelled by supposing that the rate of return on the share has a prior Gaussian distribution. We find that the effect of parameter uncertainty is typically bigger than the effects of infrequent policy review.
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Bibliographic InfoArticle provided by Springer in its journal Finance and Stochastics.
Volume (Year): 5 (2001)
Issue (Month): 2 ()
Note: received: November 1999; final version received: June 2000
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Web page: http://www.springerlink.com/content/101164/
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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