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A new optimal portfolio selection model with owner-occupied housing

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  • Hui, Eddie C.M.
  • Wang, Guangchen

Abstract

This paper develops a new dynamic optimal portfolio selection model with owner-occupied housing. Such a model has three features: (1) the objective of an agent is to minimize the deviation of her wealth to a certain pre-set financial target by selecting a suitable portfolio strategy; (2) the house price is modeled by a stochastic differential equation with Poisson jump; (3) both full information and partial information are considered. The optimal portfolio strategies with the associated optimal performance functionals are completely and explicitly obtained in terms of some methods arising from stochastic optimal control and backward stochastic differential equation. A numerical example is used to demonstrate the theoretical results.

Suggested Citation

  • Hui, Eddie C.M. & Wang, Guangchen, 2015. "A new optimal portfolio selection model with owner-occupied housing," Applied Mathematics and Computation, Elsevier, vol. 270(C), pages 714-723.
    • Handle: RePEc:eee:apmaco:v:270:y:2015:i:c:p:714-723
    DOI: 10.1016/j.amc.2015.08.075
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    References listed on IDEAS

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    1. Gang-Zhi Fan & Ming Pu & Seow Ong, 2012. "Optimal Portfolio Choices, House Risk Hedging and the Pricing of Forward House Transactions," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 3-29, June.
    2. Mondher Bellalah & Zhen Wu, 2009. "A simple model of corporate international investment under incomplete information and taxes," Annals of Operations Research, Springer, vol. 165(1), pages 123-143, January.
    3. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
    4. Yongqiang Chu, 2010. "An Intertemporal Capital Asset Pricing Model with Owner‐Occupied Housing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(3), pages 427-465, September.
    5. Patrick Bayer & Bryan Ellickson & Paul B. Ellickson, 2010. "Dynamic Asset Pricing in a System of Local Housing Markets," American Economic Review, American Economic Association, vol. 100(2), pages 368-372, May.
    6. 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.
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    Cited by:

    1. Renhe Liu & Eddie Chi-man Hui & Jiaqi Lv & Yi Chen, 2017. "What Drives Housing Markets: Fundamentals or Bubbles?," The Journal of Real Estate Finance and Economics, Springer, vol. 55(4), pages 395-415, November.

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