A Risk Extended Version of Merton's Optimal Consumption and Portfolio Selection

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

2 Scopus Citations
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Detail(s)

Original languageEnglish
Pages (from-to)815-829
Journal / PublicationOperations Research
Volume70
Issue number2
Online published9 Feb 2022
Publication statusPublished - Mar 2022

Abstract

The objective of this paper is to study the optimal consumption and portfolio choice problem of risk-controlled investors who strive to maximize total expected discounted utility of both consumption and terminal wealth. Risk is measured by the variance of terminal wealth, which introduces a nonlinear function of the expected value into the control problem. The control problem presented is no longer a standard stochastic control problem but rather, a mean field-type control problem. The optimal portfolio and consumption rules are obtained explicitly. Numerical results shed light on the importance of controlling variance risk. The optimal investment policy is nonmyopic, and consumption is not sacrificed.

Research Area(s)

  • consumption and portfolio choice, risk management, meanfield-type control, fixed point problem, time inconsistency, VARIANCE PORTFOLIO SELECTION, VALUE-AT-RISK, OPTIMIZATION, INVESTMENT, POLICIES, MODEL

Citation Format(s)

A Risk Extended Version of Merton's Optimal Consumption and Portfolio Selection. / Bensoussan, Alain; Hoe, SingRu (Celine); Kim, Joohyun et al.

In: Operations Research, Vol. 70, No. 2, 03.2022, p. 815-829.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review