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 Portfolio and Consumption Choice with Stochastic Investment Opportunities and Habit Formation in Preferences written by Claus Munk and published by . This book was released on 2002 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the dynamic consumption and portfolio choice of an investor who has habit formation in preferences and access to a complete financial market. For general, possibly non-Markov, dynamics of market prices, we provide an exact characterization of the optimal behavior in terms of two relatively simple and intuitively interpretable stochastic processes. We study in more detail the optimal strategies in two concrete examples of time-varying investment opportunities. Firstly, we derive a closed-form solution of the optimal consumption and portfolio choice with mean-reverting stock returns. Secondly, with Cox-Ingersoll-Ross interest rate dynamics we can express the optimal strategies in terms of the solution to a partial differential equation, which has an explicit solution for time-additive preferences, but not with habit formation. Our numerical examples show that, while hedging demands for various assets are affected differently by habit persistence, the main effect on relative asset allocations stems from the fact that some assets (bonds and cash) are better investment objects than others (stocks) when it comes to ensuring that future consumption will not fall below the habit level. The implications of habit persistence in models with labor income are also addressed.

Download or read book Strategic Asset Allocation written by John Y. Campbell and published by OUP Oxford. This book was released on 2002-01-03 with total page 272 pages. Available in PDF, EPUB and Kindle. Book excerpt: Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.

Download or read book Lifetime Consumption Portfolio Choice Under Trading Constraints Recursive Preferences and Nontradeable Income written by Mark D. Schroder and published by . This book was released on 2003 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider the lifetime consumption-portfolio problem in a competitive securities market with essentially arbitrary continuous price dynamics, a possibly nontradeable income stream, and convex constraints on the vector of market values of financial positions. (The setting extends Schroder and Skiadas, 2002, where the endowment is assumed tradeable and constraints are imposed in terms of wealth proportions.) For any utility function with a supergradient density, we develop the first-order conditions of optimality, a side-product being the characterization of a constrained notion of state-pricing. The methodology is applied to generalized continuous-time recursive utility, allowing for first and second-order risk-aversion that can depend on the risk source, reflecting the source's quot;ambiguity.quot; Within this class, we isolate a more tractable formulation in which preferences exhibit no wealth effects (an example being time-additive expected discounted exponential utility), and there is unrestricted trading in a money market and a suitably defined consol bond. In this case, we derive closed-form solutions for the optimal consumption and trading strategy in terms of the solution to a single constrained backward stochastic differential equation (BSDE), which in a Markovian setting maps to a PDE. Methodologically, we develop the utility gradient approach, but for the wealth-invariant case we also verify the solution using the dynamic programming approach, without having to assume a Markovian structure. Finally, we present a class of parametric examples in which the PDE characterizing the solution simplifies to a system of ordinary differential equations (of the Riccati type).

Download or read book Portfolio Choice with Internal Habit Formation written by Francisco J. Gomes and published by . This book was released on 2003 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Portfolio Selection Using Multi Objective Optimisation written by Saurabh Agarwal and published by Springer. This book was released on 2017-08-21 with total page 240 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book explores the risk-return paradox in portfolio selection by incorporating multi-objective criteria. Empirical research is presented on the development of alternate portfolio models and their relative performance in the risk/return framework to provide solutions to multi-objective optimization. Next to outlining techniques for undertaking individual investor’s profiling and portfolio programming, it also offers a new and practical approach for multi-objective portfolio optimization. This book will be of interest to Foreign Institutional Investors (FIIs), Mutual Funds, investors, and researchers and students in the field.

Download or read book Risk Aversion and Portfolio Choice written by Donald D. Hester and published by . This book was released on 1967 with total page 200 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Handbook of Computational Finance written by Jin-Chuan Duan and published by Springer Science & Business Media. This book was released on 2011-10-25 with total page 791 pages. Available in PDF, EPUB and Kindle. Book excerpt: Any financial asset that is openly traded has a market price. Except for extreme market conditions, market price may be more or less than a “fair” value. Fair value is likely to be some complicated function of the current intrinsic value of tangible or intangible assets underlying the claim and our assessment of the characteristics of the underlying assets with respect to the expected rate of growth, future dividends, volatility, and other relevant market factors. Some of these factors that affect the price can be measured at the time of a transaction with reasonably high accuracy. Most factors, however, relate to expectations about the future and to subjective issues, such as current management, corporate policies and market environment, that could affect the future financial performance of the underlying assets. Models are thus needed to describe the stochastic factors and environment, and their implementations inevitably require computational finance tools.

Download or read book Japan written by International Monetary Fund. Monetary and Capital Markets Department and published by International Monetary Fund. This book was released on 2017-09-18 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: This Technical Note analyzes and quantifies the effect of aging in Japan—both at the national and regional levels—on the nature of financial intermediation. Mounting demographic headwinds constitute a major challenge for regional financial institutions in Japan. According to prefectural population projections and econometric estimates, the impact from demographic headwinds is likely to intensify significantly over the next two decades. Financial sector policies should aim to address the constraints to financial access by further promoting risk-based lending and asset-based lending. Banks should continue to be encouraged to build capacity for risk assessment to do more risk-based lending.

Download or read book Portfolio Theory and the Demand for Money written by Neil Thompson and published by Springer. This book was released on 2016-07-27 with total page 223 pages. Available in PDF, EPUB and Kindle. Book excerpt: The book is an in-depth review of the theory and empirics of the demand for money and other financial assets. The different theoretical approaches to the portfolio choice problem are described, together with an up-to-date survey of the results obtained from empirical studies of asset choice behaviour. Both single-equation studies and the more complete multi-asset portfolio models, are analysed.

Download or read book Essays in Asset Pricing and Portfolio Choice written by Philipp Karl Illeditsch and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In the Ơ̐1rst essay, I decompose inƠ̐2ation risk into (i) a part that is correlated with real returns on the market portfolio and factors that determine investor0́9s preferences and investment opportunities and (ii) a residual part. I show that only the Ơ̐1rst part earns a risk premium. All nominal Treasury bonds, including the nominal money-market account, are equally exposed to the residual part except inƠ̐2ation-protected Treasury bonds, which provide a means to hedge it. Every investor should put 100% of his wealth in the market portfolio and inƠ̐2ation-protected Treasury bonds and hold a zero-investment portfolio of nominal Treasury bonds and the nominal money market account. In the second essay, I solve the dynamic asset allocation problem of Ơ̐1nite lived, constant relative risk averse investors who face inƠ̐2ation risk and can invest in cash, nominal bonds, equity, and inƠ̐2ation-protected bonds when the investment opportunityset is determined by the expected inƠ̐2ation rate. I estimate the model with nominal bond, inƠ̐2ation, and stock market data and show that if expected inƠ̐2ation increases, then investors should substitute inƠ̐2ation-protected bonds for stocks and they should borrow cash to buy long-term nominal bonds. In the lastessay, I discuss how heterogeneity in preferences among investors withexternal non-addictive habit forming preferences aƠ̐0ects the equilibrium nominal term structure of interest rates in a pure continuous time exchange economy and complete securities markets. Aggregate real consumption growth and inƠ̐2ation are exogenously speciƠ̐1ed and contain stochastic components thataƠ̐0ect their means andvolatilities. There are two classes of investors who have external habit forming preferences and diƠ̐0erent localcurvatures oftheir utility functions. The eƠ̐0ects of time varying risk aversion and diƠ̐0erent inƠ̐2ation regimes on the nominal short rate and the nominal market price of risk are explored, and simple formulas for nominal bonds, real bonds, and inƠ̐2ation risk premia that can be numerically evaluated using Monte Carlo simulation techniques are provided.

Download or read book A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning about Return Predictability written by Michael W. Brandt and published by . This book was released on 2004 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: "We present a simulation-based method for solving discrete-time portfolio choice problems involving non-standard preferences, a large number of assets with arbitrary return distribution, and, most importantly, a large number of state variables with potentially path-dependent or non-stationary dynamics. The method is flexible enough to accommodate intermediate consumption, portfolio constraints, parameter and model uncertainty, and learning. We first establish the properties of the method for the portfolio choice between a stock index and cash when the stock returns are either iid or predictable by the dividend yield. We then explore the problem of an investor who takes into account the predictability of returns but is uncertain about the parameters of the data generating process. The investor chooses the portfolio anticipating that future data realizations will contain useful information to learn about the true parameter values"--National Bureau of Economic Research web site.

Download or read book Asset Pricing Theory written by Costis Skiadas and published by Princeton University Press. This book was released on 2009-02-09 with total page 363 pages. Available in PDF, EPUB and Kindle. Book excerpt: Asset Pricing Theory is an advanced textbook for doctoral students and researchers that offers a modern introduction to the theoretical and methodological foundations of competitive asset pricing. Costis Skiadas develops in depth the fundamentals of arbitrage pricing, mean-variance analysis, equilibrium pricing, and optimal consumption/portfolio choice in discrete settings, but with emphasis on geometric and martingale methods that facilitate an effortless transition to the more advanced continuous-time theory. Among the book's many innovations are its use of recursive utility as the benchmark representation of dynamic preferences, and an associated theory of equilibrium pricing and optimal portfolio choice that goes beyond the existing literature. Asset Pricing Theory is complete with extensive exercises at the end of every chapter and comprehensive mathematical appendixes, making this book a self-contained resource for graduate students and academic researchers, as well as mathematically sophisticated practitioners seeking a deeper understanding of concepts and methods on which practical models are built. Covers in depth the modern theoretical foundations of competitive asset pricing and consumption/portfolio choice Uses recursive utility as the benchmark preference representation in dynamic settings Sets the foundations for advanced modeling using geometric arguments and martingale methodology Features self-contained mathematical appendixes Includes extensive end-of-chapter exercises

Download or read book Intertemporal Consumption Choices Transaction Costs and Limited Participation to Financial Markets written by Orazio P. Attanasio and published by . This book was released on 2007 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper builds a unifying framework that, within the theory of intertemporal consumption choices, brings together the limited participation -based explanation of the poor empirical performance of the C-CAPM and the transaction costs-based explanation of incomplete portfolios. Using the implications of the consumption model and observed household consumption and portfolio choices, we identify the preference parameters of interest and a lower bound for the costs rationalizing non-participation in financial markets, in the presence of unobserved heterogeneity in tastes for consumption and portfolio allocation. Using the US Consumer Expenditure Survey and assuming isoelastic preferences, we estimate the coefficient of relative risk aversion at 1.7 and a cost bound of 0.4 percent of non-durable consumption. Our estimate of the preference parameter is theoretically plausible and the bound sufficiently small to be likely to be exceeded by the actual total (observable and unobservable) costs of participating to financial markets.

Download or read book Developments in Mean Variance Efficient Portfolio Selection written by M. Agarwal and published by Springer. This book was released on 2015-12-11 with total page 259 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book discusses new determinants for optimal portfolio selection. It reviews the existing modelling framework and creates mean-variance efficient portfolios from the securities companies on the National Stock Exchange. Comparisons enable researchers to rank them in terms of their effectiveness in the present day Indian securities market.

Download or read book Investors and Markets written by William F. Sharpe and published by Princeton University Press. This book was released on 2011-01-01 with total page 232 pages. Available in PDF, EPUB and Kindle. Book excerpt: In Investors and Markets, Nobel Prize-winning financial economist William Sharpe shows that investment professionals cannot make good portfolio choices unless they understand the determinants of asset prices. But until now asset-price analysis has largely been inaccessible to everyone except PhDs in financial economics. In this book, Sharpe changes that by setting out his state-of-the-art approach to asset pricing in a nonmathematical form that will be comprehensible to a broad range of investment professionals, including investment advisors, money managers, and financial analysts. Bridging the gap between the best financial theory and investment practice, Investors and Markets will help investment professionals make better portfolio choices by being smarter about asset prices. Based on Sharpe's Princeton Lectures in Finance, Investors and Markets presents a method of analyzing asset prices that accounts for the real behavior of investors. Sharpe makes this technique accessible through a new, one-of-a-kind computer program (available for free on his Web site, at http://www.stanford.edu/~wfsharpe/apsim/index.html) that enables users to create virtual markets, setting the starting conditions and then allowing trading until equilibrium is reached and trading stops. Program users can then analyze the final portfolios and asset prices, see expected returns, and measure risk. In addition to popularizing the most sophisticated form of asset-price analysis, Investors and Markets summarizes much of Sharpe's most important previous work and reflects a lifetime of thinking about investing by one of the leading minds in financial economics. Any serious investment professional will benefit from Sharpe's unique insights.

Download or read book Keynes and Modern Economics written by Ryuzo Kuroki and published by Routledge. This book was released on 2012-08-21 with total page 290 pages. Available in PDF, EPUB and Kindle. Book excerpt: It is a little over seventy years since John Maynard Keynes produced his magnum opus, The General Theory of Employment, Interest, and Money. Keynes' staggering achievement has been to remain relevant to economics and other disciplines even today and this book reflects that with an examination on his influence on modern economics. Leading economists from a variety of backgrounds, including Ed Nell and Heinz Kurz have joined forces in this volume with internationally respected Japanese scholars to produce a strong collection of contributions to the debate on Keynes' monumental legacy. This book will be vital reading for historians of economic thought, economic methodologists as well as those economists with an interest in the overall development of their discipline.