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Investment Strategies for HARA Utility Function : A General Algebraic Approximated Solution

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Author Info
Francesco, MENONCIN (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

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Abstract

In an incomplete financial market where an investor maximizes the expected HARA utility of his terminal real wealth, we present an algebraic approximated solution for the optimal portfolio composition. We take into account : (i) a (finite) set of assets, (ii) a (finite) set of state variables and (iii) a consumption price process, all of them described by general Ito processes; Finally, we supply an easy test for checking the goodness of the approximated result.

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Publisher Info
Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2002034.

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Length: 18
Date of creation: 01 Aug 2002
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Handle: RePEc:ctl:louvir:2002034

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Related research
Keywords: Incomplete Market; Inflation Risk; Hamilton-Jacobi-Bellman equation; HARA utility function;

Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October. [Downloadable!] (restricted)
  2. Wachter, Jessica A., 2002. "Portfolio and Consumption Decisions under Mean-Reverting Returns: An Exact Solution for Complete Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(01), pages 63-91, March. [Downloadable!]
  3. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November. [Downloadable!] (restricted)
  4. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Harvard Institute of Economic Research Working Papers 1897, Harvard - Institute of Economic Research. [Downloadable!]
    Other versions:
  5. Menoncin, Francesco, 2002. "Optimal portfolio and background risk: an exact and an approximated solution," Insurance: Mathematics and Economics, Elsevier, vol. 31(2), pages 249-265, October. [Downloadable!] (restricted)
  6. Cox, John C. & Huang, Chi-fu, 1991. "A variational problem arising in financial economics," Journal of Mathematical Economics, Elsevier, vol. 20(5), pages 465-487. [Downloadable!] (restricted)
  7. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December. [Downloadable!] (restricted)
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  8. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August. [Downloadable!] (restricted)
  9. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March. [Downloadable!] (restricted)
  10. George CHACKO & Luis M. VICEIRA, 1999. "Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets," FAME Research Paper Series rp11, International Center for Financial Asset Management and Engineering. [Downloadable!]
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  11. Kim, Tong Suk & Omberg, Edward, 1996. "Dynamic Nonmyopic Portfolio Behavior," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(1), pages 141-61. [Downloadable!] (restricted)
  12. Lioui, Abraham & Poncet, Patrice, 2001. "On optimal portfolio choice under stochastic interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 25(11), pages 1841-1865, November. [Downloadable!] (restricted)
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