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The Effect of Asset Price Jumps on Consumption and Investment Decisions

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  • Daglish, Toby

Abstract

This paper examines the importance of jumps in asset prices for investment problems potentially incorporating consumption decisions. We present a technique for solving investment-consumption problems when asset prices jump. We also demonstrate how to quantify utility losses using an "optimal fee" approach - measuring how much a portfolio advisor could charge an investor to provide them with the new investment technology. As an application we consider empirically plausible models for the S&P 500 index. We conclude that while there are some moderate differences in optimal investment behaviour once jumps are accounted for the actual utility loss in economic terms is very low.

Suggested Citation

  • Daglish, Toby, 2008. "The Effect of Asset Price Jumps on Consumption and Investment Decisions," Working Paper Series 19107, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    • Handle: RePEc:vuw:vuwcsr:19107
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/19107
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    1. Jérôme B. Detemple & Ren Garcia & Marcel Rindisbacher, 2003. "A Monte Carlo Method for Optimal Portfolios," Journal of Finance, American Finance Association, vol. 58(1), pages 401-446, February.
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    3. repec:bla:jfinan:v:59:y:2004:i:6:p:2809-2834 is not listed on IDEAS
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