Optimal Consumption/Investment Policies with Undiversifiable Income Risk and Borrowing Constraints
We examine the optimal consumption and portfolio choice of an investor having an initial wealth endowment and an uncertain stream of income from non-traded assets. The income stream is not spanned by traded assets, and the investor is not allowed to borrow against future income, so the financial market is incomplete. We solve the corresponding stochastic control problem numerically with the Markov chain approximation method. In particular, we find that the implicit value, the agent attaches to an uncertain income stream, can be much smaller in this incomplete market than it is in the complete market.
|Date of creation:||15 Dec 1997|
|Date of revision:|
|Note:||Type of Document - ; to print on PostScript; pages: 24 ; figures: included|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Duffie, Darrell & Fleming, Wendell & Soner, H. Mete & Zariphopoulou, Thaleia, 1997. "Hedging in incomplete markets with HARA utility," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 753-782, May.
- Svensson, L.E. & Werner, I., 1990.
"Nontraded Assets in Incomplete Markets: Pricing and Portfolio Choices,"
477, Stockholm - International Economic Studies.
- Svensson, Lars E. O. & Werner, Ingrid M., 1993. "Nontraded assets in incomplete markets : Pricing and portfolio choice," European Economic Review, Elsevier, vol. 37(5), pages 1149-1168, June.
- Darrell Duffie & Thaleia Zariphopoulou, 1993. "Optimal Investment With Undiversifiable Income Risk," Mathematical Finance, Wiley Blackwell, vol. 3(2), pages 135-148.
- R. C. Merton, 1970.
"Optimum Consumption and Portfolio Rules in a Continuous-time Model,"
58, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- Cuoco, Domenico, 1997. "Optimal Consumption and Equilibrium Prices with Portfolio Constraints and Stochastic Income," Journal of Economic Theory, Elsevier, vol. 72(1), pages 33-73, January.
- Hindy, Ayman & Huang, Chi-fu & Zhu, Steven H., 1997. "Numerical analysis of a free-boundary singular control problem in financial economics," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 297-327.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:9712003. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.