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Optimal smooth consumption and annuity design

  • Bruhn, Kenneth
  • Steffensen, Mogens
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    We propose an optimization criterion that yields extraordinary consumption smoothing compared to the well known results of the life-cycle model. Under this criterion we solve the related consumption and investment optimization problem faced by individuals with preferences for intertemporal stability in consumption. We find that the consumption and investment patterns demanded under the optimization criterion is in general offered as annuity benefits from products in the class of ‘Formula Based Smoothed Investment-Linked Annuities’.

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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 37 (2013)
    Issue (Month): 8 ()
    Pages: 2693-2701

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    Handle: RePEc:eee:jbfina:v:37:y:2013:i:8:p:2693-2701
    DOI: 10.1016/j.jbankfin.2013.03.015
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    1. A. Abel, 2010. "Asset prices under habit formation and catching up with the Jones," Levine's Working Paper Archive 1395, David K. Levine.
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    7. Sundaresan, Suresh M, 1989. "Intertemporally Dependent Preferences and the Volatility of Consumption and Wealth," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 73-89.
    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.
    9. Munk, Claus, 2008. "Portfolio and consumption choice with stochastic investment opportunities and habit formation in preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3560-3589, November.
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    12. Black, Fischer, 1990. "Mean Reversion and Consumption Smoothing," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 107-14.
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