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Annuitization and asset allocation under exponential utility

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  • Liang, Xiaoqing
  • Young, Virginia R.

Abstract

We find the optimal investment, consumption, and annuitization strategies for a retiree who wishes to maximize her expected discounted utility of lifetime consumption. We assume that the retiree’s preferences exhibit constant absolute risk aversion (CARA), that is, the retiree’s utility function is exponential. The retiree invests in a financial market with one riskless and one risky asset, the so-called Black–Scholes market. Moreover, the retiree may purchase single-premium immediate life annuity income that is payable continuously, and she may purchase this life annuity income at any time and for any amount, subject to the limit of her available wealth.

Suggested Citation

  • Liang, Xiaoqing & Young, Virginia R., 2018. "Annuitization and asset allocation under exponential utility," Insurance: Mathematics and Economics, Elsevier, vol. 79(C), pages 167-183.
    • Handle: RePEc:eee:insuma:v:79:y:2018:i:c:p:167-183
    DOI: 10.1016/j.insmatheco.2018.01.005
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    References listed on IDEAS

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