Download or read book Consumption Decision Portfolio Choice and Healthcare Irreversible Investment written by Giorgio Ferrari and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a tractable dynamic framework for the joint determination of optimal consumption, portfolio choice, and healthcare irreversible investment. Our model is based on a Merton's portfolio and consumption problem, where, in addition, the agent can choose the time at which undertaking a costly lump sum health investment decision. Health depreciates with age and directly affects the agent's mortality force, so that investment into healthcare reduces the agent's mortality risk. The resulting optimization problem is formulated as a stochastic control-stopping problem with a random time-horizon and state-variables given by the agent's wealth and health capital. We transform this problem into its dual version, which is now a two-dimensional optimal stopping problem with interconnected dynamics and finite time-horizon. Regularity of the optimal stopping value function is derived and the related free boundary surface is proved to be Lipschitz continuous and it is characterized as the unique solution to a nonlinear integral equation. In the original coordinates, the agent thus invests into healthcare whenever her wealth exceeds an age- and health-dependent transformed version of the optimal stopping boundary.

Download or read book Consumption Descision Portfolio Choice and Healthcare Irreversible Investment written by Giorgio Ferrari and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book ESSAYS ON PORTFOLIO CHOICE AND HEALTH OVER THE LIFE CYCLE written by You Du and published by . This book was released on 2021 with total page 97 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation examines the effect of health and its associated variables on households' consumption and portfolio choices over life cycle. The first two essays constitute my job market paper, which explains why the risky portfolio share rises in wealth from two health mechanisms: endogenous health investment and medical expenditure risk. The third chapter explores the effect of health and health risk on households' optimal consumption and portfolio decisions over life cycle. Chapter 1 titled ``PORTFOLIO CHOICE AND HEALTH ACROSS WEALTH: EMPIRICAL EVIDENCE" illustrates the empirical relationship between the portfolio puzzle and the heterogeneity of health variables across wealth. Classic financial theory suggests that under the assumption of no borrowing constraints and no mean-reverting stock returns, households should hold a constant risky portfolio in spite of their wealth, ages and life horizons (Samuelson (1969) and Merton (1969, 1971)). Yet data from the Survey of Consumers Finances (SCF) show that the risky portfolio share of financial assets increases in wealth. In the literature, this is called the ``portfolio puzzle". Meanwhile, various sources of data indicate that, compared with the non-wealthy households, the wealthy people have better health, longer life horizon, higher out of pocket medical spending with lower uncertainty, and more health care time. All these facts suggest a novel correlation between the portfolio puzzle and the heterogeneity of health variables across wealth and provide a robust empirical foundation to explain the portfolio puzzle from a health perspective. In Chapter 2 titled ``A LIFE CYCLE MODEL OF PORTFOLIO CHOICE AND HEALTH", a life cycle model with endogenous health investment and medical expenditure risk is proposed to capture the key empirical features in the first chapter. This calibrated model remarkably matches the U.S. data. I find that endogenous health investment is essential to explain the portfolio puzzle: if health is exogenous without investment, the model can only could deliver 7.2% of the risky share gap across wealth. Medical expenditure risk is less important and has a larger effect on the non-wealthy group. If I abstract from medical expenditure risk, the risky shares increase for both groups: 24% for the low wealth group and 5% for the wealthy group. This life cycle model provides new insights into how health affects households' financial behavior. Chapter 3 titled ``OPTIMAL CONSUMPTION AND PORTFOLIO CHOICE WITH HEALTH RISK" investigates the effect of health and health risk on households' optimal consumption and portfolio allocations over the life cycle. The simulation results show that consumption, savings in bonds, and savings in stocks all increase with health. The risky portfolio share, which is the ratio of savings in stocks to the total financial assets, demonstrates the same tendency for both health states over the life cycle: at the very young age, the risky portfolio share is relatively high. Starting from the middle age, this share falls significantly and keeps steady until the end of life. For most of the lifetime, the risky portfolio share is positively related with health. These results emphasize the importance of health and its associated risk in consumption and portfolio decisions.

Download or read book Consumption and Portfolio Decisions When Expected Returns are Time Varying written by John Y. Campbell and published by . This book was released on 2010 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes and implements a new approach to a classic unsolved problem in financial economics: the optimal consumption and portfolio choice problem of a long-lived investor facing time-varying investment opportunities. The investor is assumed to be infinitely-lived, to have recursive Epstein-Zin-Weil utility, and to choose in discrete time between a riskless asset with a constant return, and a risky asset with constant return variance whose expected log return follows and AR(1) process. The paper approximates the choice problem by log-linearizing the budget constraint and Euler equations, and derives an analytical solution to the approximate problem. When the model is calibrated to US stock market data it implies that intertemporal hedging motives greatly increase, and may even double, the average demand for stocks by investors whose risk-aversion coefficients exceed one.

Download or read book Time Non separable Utility in Life cycle Consumption and Portfolio Choice written by Joseph P. Lupton and published by . This book was released on 2002 with total page 394 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays in Optimal Consumption and Portfolio Choice written by Jialun Li and published by . This book was released on 2012 with total page 114 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Rational Inattention Long Run Consumption Risk and Portfolio Choice written by Yulei Luo and published by . This book was released on 2009 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper explores how the introduction of rational inattention (RI) -- that agents process information subject to finite channel capacity -- affects optimal consumption and investment decisions in an otherwise standard intertemporal model of portfolio choice. We first explicitly derive optimal consumption and portfolio rules under RI and then show that introducing RI reduces the optimal share of savings invested in the risky asset because inattentive investors face greater long-run consumption risk. We also show that the investment horizon matters for portfolio allocation in the presence of RI, even if investment opportunities are constant and the utility function of investors is constant relative risk aversion. Second, after aggregating across investors, we show that introducing RI can better explain the observed joint dynamics of aggregate consumption and the asset return. Finally, we show that RI increases the implied equity premium because investors under RI face greater long-run consumption risk and thus require higher compensation in equilibrium.

Download or read book Consumption and Portfolio Choice Under Internal Multiplicative Habit Formation written by Servaas van Bilsen and published by . This book was released on 2018 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit. We obtain closed-form policies under general utility functionals and stochastic investment opportunities, by developing a non-trivial linearization to the budget constraint. This enables us to explicitly characterize how habit formation a ffects the marginal propensity to consume and optimal stock-bond investments. We also show that in a setting which combines habit formation with Epstein-Zin utility, consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease.

Download or read book Optimal Consumption and Investment with Bankruptcy written by Suresh Sethi and published by . This book was released on 2017 with total page 444 pages. Available in PDF, EPUB and Kindle. Book excerpt: The problem of optimal consumption and investment is concerned with the decisions of a single agent endowed with some initial wealth who seeks to maximize total expected discounted utility of consumption. The decisions are the rate of consumption and the allocation of their wealth directed to risky and risk-free investments over time. The problem was first studied by Paul Samuelson and Robert Merton in 1969; however none of their formulations took into account the possibility that an agent might go bankrupt in the process. In a set of articles published in 1979 and 1983, Suresh Sethi and co-authors (Abel Cadenillas, Myron Gordon, Brian Ingham, Ioannis Karatzas, John Lehoczky, Ernst Presman, Steven Shreve, and Michael Taksar) explicitly introduced a bankruptcy value/penalty in the consumption/investment model. In addition, they also introduced a nonzero subsistence consumption level, which makes the consideration of bankruptcy even more important. This provided the ability to deal mathematically with the problems of bankruptcy in the study of consumption and investment. Optimal Consumption and Investment with Bankruptcy provides a useful frame for deepening our understanding of the consumption and portfolio selection behavior of individuals and households. Foreword by Harry M. Markowitz. Not included are Chapters 2, 3 and 13, which are available directly from the websites of the specified journals in which they first appeared.

Download or read book Consumption and Portfolio Choice Over the Life Cycle written by o F. Cocco and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This article solves a realistically calibrated life cycle model of consumption and portfolio choice with non-tradable labor income and borrowing constraints. Since labor income substitutes for riskless asset holdings, the optimal share invested in equities is roughly decreasing over life. We compute a measure of the importance of human capital for investment behavior. We find that ignoring labor income generates large utility costs, while the cost of ignoring only its risk is an order of magnitude smaller, except when we allow for a disastrous labor income shock. Moreover, we study the implications of introducing endogenous borrowing constraints in this incomplete-markets setting.

Download or read book Optimal Consumption and Portfolio Choice with Borrowing Constraints written by Jean-Luc Vila and published by . This book was released on 1991 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Health Status and Portfolio Choice written by Silvia Bressan and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent empirical work on individual portfolio choice focuses on the role of the individual's health in making financial decisions. The key idea is that, through precautionary saving or reducing investors' time horizon, health issues make people choose safer financial portfolios. This paper questions the empirical relevance of the link between health and portfolio choice, measured as stock ownership and overall fraction of risky securities held.We handle with caution the findings from previous papers and ask whether data from the first wave of the Survey of Health, Aging and Retirement in Europe (SHARE) are able to clarify some of our doubts. We find that only poor self-reported health negatively impacts the portfolio choice, while other health measures (chronic conditions, limitations in daily activities of life, mental health) are irrelevant for investment decisions.

Download or read book Consumption and Portfolio Choice Under Loss Aversion and Endogenous Updating of the Reference Level written by Servaas van Bilsen and published by . This book was released on 2017 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: We explicitly derive and explore the optimal consumption and portfolio policies of a loss- averse individual who endogenously updates his reference level over time. We find that he protects his current consumption by delaying painful reductions in consumption after a drop in wealth, and increasingly so with higher degrees of endogeneity. The incentive to protect current consumption is stronger with a medium wealth level than with a high or low wealth level. Furthermore, this individual adopts a conservative investment strategy in normal states and typically a more aggressive strategy in good and bad states. Endogeneity of the reference level increases overall risk-taking and generates an incentive to reduce risk exposure with age even without human capital. The welfare loss that this individual would suffer under the conventional CRRA consumption and portfolio policies typically exceeds 10%.

Download or read book Optimal Investment Consumption and Retirement Choice Problem with Disutility and Subsistence Consumption Constraints written by Byung Hwa Lim and published by . This book was released on 2010 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we consider a general optimal consumption-portfolio selection problem of an infinitely-lived agent whose consumption rate process is subject to subsistence constraints before retirement. That is, her consumption rate should be greater than or equal to some positive constant before retirement. We integrate three optimal decisions which are the optimal consumption, the optimal investment choice and the optimal stopping problem in which the agent chooses her retirement time in one model. We obtain the explicit forms of optimal policies using a martingale method and a variational inequality arising from the dual function of the optimal stopping problem. We treat the optimal retirement time as the first hitting time when her wealth exceeds a certain wealth level which will be determined by a free boundary value problem and duality approaches. We also derive closed forms of the optimal wealth processes before and after retirement. Some numerical examples are presented for the case of constant relative risk aversion (CRRA) utility class.

Download or read book Optimal Consumption and Portfolio Choice with Loss Aversion written by Giuliano Curatola and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Consumption portfolio Choice with Preferences for Cash written by Holger Kraft and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies a consumption-portfolio problem where money enters the agent's utility function. We solve the corresponding Hamilton-Jacobi-Bellman equation and provide closed-form solutions for the optimal consumption and portfolio strategy both in an infinite- and finite-horizon setting. For the infinite-horizon problem, the optimal stock demand is one particular root of a polynomial. In the finite-horizon case, the optimal stock demand is given by the inverse of the solution to an ordinary differential equation that can be solved explicitly. We also prove verification results showing that the solution to the Bellman equation is indeed the value function of the problem. From an economic point of view, we find that in the finite-horizon case the optimal stock demand is typically decreasing in age, which is in line with rules of thumb given by financial advisers and also with recent empirical evidence.

Download or read book Robust Consumption and Portfolio Choice for Time varying Investment Opportunities written by Hening Liu and published by . This book was released on 2009 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: