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Optimal Real Consumption and Asset Allocation for a HARA Investor with Labour Income

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  • Francesco, MENONCIN

    (Universita de Brescia, ITALY)

Abstract

In this paper, we take into account a very general setting with : (i) a set of stochastic investment opportunities, (ii) a set of risky assets, (iii) a riskless asset paying a stochastic interest rate, (iv) a stochastic inflation risk, (v) stochastic labor income , and (vi) HARA preferences. We compute a quasi-explicit solution for both the optimal consumption and asset allocation. This solution is based on two changes in the probability measure. We also show that the investor behaves as if he could rely on his wealth augmented by the expected value of all his “forward real labor incomes”

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Bibliographic 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 2003015.

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Length: 30
Date of creation: 01 Nov 2003
Date of revision:
Handle: RePEc:ctl:louvir:2003015

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Related research

Keywords: Asset Allocation; Inflation risk; Stochastic labour income; Stochastic investment opportunities; Feynman-Kac theorem;

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  1. Damgaard, Anders & Fuglsbjerg, Brian & Munk, Claus, 2003. "Optimal consumption and investment strategies with a perishable and an indivisible durable consumption good," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 209-253, November.
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  8. Paolo BATTOCCHIO & Francesco MENONCIN, 2002. "Optimal Pension Management under Stochastic Interest Rates, Wages, and Inflation," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2002021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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  15. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
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