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A Semi-analytical Solution to Consumption and International Asset Allocation Problem

Author

Listed:
  • Bolorsuvd BATBOLD
  • Kentaro Kikuchi
  • Koji Kusuda

    (Faculty of Economics, Shiga University)

Abstract

We consider a finite continuous-time optimal consumption and in-ternational asset allocation problem for an agent with CRRA utility, assuming a quadratic factor international security market model in which, latent factors are constituted of global economy factors and currency specific factors. It is not generally straightforward to find an analytical solution to the partial differential equation (PDE, hereafter) for the agent's indirect utility function, since a non-homogeneous term appears in the PDE. We apply a method of Liu [11] and Batbold et al. [4] to the PDE, and derive a semi-analytical solution. In the optimal investment ratio based on the solution, the market price of currency specific risk, the disparities between domestic and foreign market prices of global economy risk, and the disparities between domestic and for-eign market prices of currency specific risk appear.

Suggested Citation

  • Bolorsuvd BATBOLD & Kentaro Kikuchi & Koji Kusuda, "undated". "A Semi-analytical Solution to Consumption and International Asset Allocation Problem," Discussion Papers CRR Discussion Paper Series B: Financial 17, Shiga University, Faculty of Economics,Center for Risk Research.
    • Handle: RePEc:shg:dpapeb:17
    as

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    File URL: https://www.econ.shiga-u.ac.jp/risk/DPB17Kusuda.pdf
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    References listed on IDEAS

    as
    1. Kentaro Kikuchi, "undated". "A Global Joint Pricing Model of Stocks and Bonds Based on the Quadratic Gaussian Approach," Discussion Papers CRR Discussion Paper Series B: Financial 18, Shiga University, Faculty of Economics,Center for Risk Research.
    2. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    3. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
    4. Campbell, John Y, 1993. "Intertemporal Asset Pricing without Consumption Data," American Economic Review, American Economic Association, vol. 83(3), pages 487-512, June.
    5. Jun Liu, 2007. "Portfolio Selection in Stochastic Environments," The Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 1-39, January.
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