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Optimal allocation of wealth for two consuming agents sharing a portfolio

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  • Oumar Mbodji

    (FiME Lab, IMPA)

  • Adrien Nguyen Huu

    (FiME Lab, IMPA)

  • Traian A. Pirvu
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    Abstract

    We study the Merton problem of optimal consumption-investment for the case of two investors sharing a final wealth. The typical example would be a husband and wife sharing a portfolio looking to optimize the expected utility of consumption and final wealth. Each agent has different utility function and discount factor. An explicit formulation for the optimal consumptions and portfolio can be obtained in the case of a complete market. The problem is shown to be equivalent to maximizing three different utilities separately with separate initial wealths. We study a numerical example where the market price of risk is assumed to be mean reverting, and provide insights on the influence of risk aversion or discount rates on the initial optimal allocation.

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    File URL: http://arxiv.org/pdf/1402.1052
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1402.1052.

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    Date of creation: Feb 2014
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    Handle: RePEc:arx:papers:1402.1052

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    Web page: http://arxiv.org/

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    1. Ekeland, Ivar & Mbodji, Oumar & Pirvu, Traian A., 2012. "Time-Consistent Portfolio Management," Economics Papers from University Paris Dauphine 123456789/11473, Paris Dauphine University.
    2. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(2), pages 246-73, April.
    3. Kim, Tong Suk & Omberg, Edward, 1996. "Dynamic Nonmyopic Portfolio Behavior," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 141-61.
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