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Optimal Consumption and Investment under Time-Varying Liquidity Constraints

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  • Ahn, Seryoong
  • Choi, Kyoung Jin
  • Lim, Byung Hwa

Abstract

We study consumption and investment decisions given realistic time-varying constraints on borrowing. We first consider the case where borrowing is constrained by a maximum debt-to-income ratio. We then consider collateral borrowing with a maximum loan-to-value ratio. The resulting implications for optimal policies differ considerably from those obtained in the existing literature based on fixed borrowing limits but are consistent with those documented in the empirical literature.

Suggested Citation

  • Ahn, Seryoong & Choi, Kyoung Jin & Lim, Byung Hwa, 2019. "Optimal Consumption and Investment under Time-Varying Liquidity Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(4), pages 1643-1681, August.
    • Handle: RePEc:cup:jfinqa:v:54:y:2019:i:04:p:1643-1681_00
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    Cited by:

    1. Weidong Tian & Zimu Zhu, 2020. "A Portfolio Choice Problem Under Risk Capacity Constraint," Papers 2005.13741, arXiv.org, revised Dec 2021.
    2. Jeon, Junkee & Park, Kyunghyun, 2023. "Optimal job switching and retirement decision," Applied Mathematics and Computation, Elsevier, vol. 443(C).
    3. Weidong Tian & Zimu Zhu, 2022. "A portfolio choice problem under risk capacity constraint," Annals of Finance, Springer, vol. 18(3), pages 285-326, September.
    4. Weidong Tian & Zimu Zhu, 2022. "Smoothness of the Value Function for Optimal Consumption Model with Consumption-Wealth Utility and Borrowing Constraint," Papers 2210.01016, arXiv.org, revised Dec 2023.
    5. Lee, Ho-Seok & Lim, Byung Hwa, 2023. "Personal bankruptcy and post-bankruptcy liquidity constraint," Journal of Banking & Finance, Elsevier, vol. 152(C).
    6. Jang, Bong-Gyu & Park, Seyoung & Zhao, Huainan, 2020. "Optimal retirement with borrowing constraints and forced unemployment risk," Insurance: Mathematics and Economics, Elsevier, vol. 94(C), pages 25-39.

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