Portfolio And Consumption Choice With Habit Formation Under Inflation
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Portfolio And Consumption Choice With Habit Formation Under Inflation
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Author : Frank De Jong
language : en
Publisher:
Release Date : 2013
Portfolio And Consumption Choice With Habit Formation Under Inflation written by Frank De Jong and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with categories.
We investigate the optimal portfolio and consumption policies for a finite-horizon investor in a life-cycle model with habit formation and inflation risk. We consider two types of habit investors: one forms habit based on real past consumption, while the other on nominal past consumption, which is motivated by money illusion. The optimal strategy is expressed explicitly in terms of the solution to a linear partial differential equation. We find that the effects of inflation on the optimal strategy depend on the type of habit investor, because it determines the risk profile of the hedge portfolio and subsistence portfolio. This dependence is robust to the incompleteness of the financial market.
Portfolio And Consumption Choice With Stochastic Investment Opportunities And Habit Formation In Preferences
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Author : Claus Munk
language : en
Publisher:
Release Date : 2002
Portfolio And Consumption Choice With Stochastic Investment Opportunities And Habit Formation In Preferences written by Claus Munk and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002 with categories.
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.
Optimal Consumption And Portfolio Rules With Durability And Habit Formation
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Author : Ayman Hindy
language : en
Publisher:
Release Date : 2005
Optimal Consumption And Portfolio Rules With Durability And Habit Formation written by Ayman Hindy and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005 with categories.
We study a model of consumption choice and portfolio allocation that captures, in two different interpretations, the combined effect of local substitution and habit formation and the combined effect of durability of consumption goods and habit formation over service flows from those goods. In a third interpretation, the model captures the idea of a dual purpose commodity. The optimal allocation problem is from the class of free boundary singular control problems. We discuss, formally, necessary, and sufficient conditions for a consumption and portfolio policy to be optimal. We also introduce a numerical technique based on approximating the original program by a sequence of discrete parameter Markov chain control problems. We provide convergence results of the value function, the optimal investment policy, and the optimal consumption regions in the approximating discrete control problems to those in the original continuous time dynamic program. We construct numerically the consumption boundary that divides the state space into two regions - one of immediate consumption and the other of abstinence. We show that both the wealth required to start consuming and the optimal fraction of wealth invested in the risky asset are cyclical functions in both the stock of the durable good and the standard of living. This is due to the interaction between the durability and habit formation effects. We also study the effect of the cyclical investment behavior on the equilibrium risk premium in a representative consumer economy.
Consumption And Portfolio Choice Under Internal Multiplicative Habit Formation
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Author : Servaas van Bilsen
language : en
Publisher:
Release Date : 2018
Consumption And Portfolio Choice Under Internal Multiplicative Habit Formation written by Servaas van Bilsen and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.
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.
Optimal Consumption And Portfolio Rules With Durability And Habit Formation Classic Reprint
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Author : Ayman Hindy
language : en
Publisher: Forgotten Books
Release Date : 2018-03
Optimal Consumption And Portfolio Rules With Durability And Habit Formation Classic Reprint written by Ayman Hindy and has been published by Forgotten Books this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018-03 with Business & Economics categories.
Excerpt from Optimal Consumption and Portfolio Rules With Durability and Habit Formation We entertain three different economic ideas in three different interpretations of the model specified in and In one interpretation, preferences given by (1) exhibit the notions of local substitution and habit formation. Agents with such preferences treat consumptions at adjacent dates as close substitutes and consumptions at distant dates as complements. In a second interpretation, the model represents habit forming preferences over the service flows from irreversible purchases of a durable good that decays over time. In the third interpretation, the model represents preferences for consumption of a dual purpose commodity that provides the agent with two sources of utility. The two components of such a composite good, however, have different half - lives. About the Publisher Forgotten Books publishes hundreds of thousands of rare and classic books. Find more at www.forgottenbooks.com This book is a reproduction of an important historical work. Forgotten Books uses state-of-the-art technology to digitally reconstruct the work, preserving the original format whilst repairing imperfections present in the aged copy. In rare cases, an imperfection in the original, such as a blemish or missing page, may be replicated in our edition. We do, however, repair the vast majority of imperfections successfully; any imperfections that remain are intentionally left to preserve the state of such historical works.
Portfolio Choice With Internal Habit Formation
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Author : Francisco Gomes
language : en
Publisher:
Release Date : 2008
Portfolio Choice With Internal Habit Formation written by Francisco Gomes and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.
Motivated by the success of internal habit formation preferences in explaining asset pricing puzzles, we introduce these preferences in a life-cycle model of consumption and portfolio choice with liquidity constraints, undiversifiable labor income risk and stock-market participation costs. In contrast to the initial motivation, we find that the model is not able to simultaneously match two very important stylized facts: A low stock market participation rate, and moderate equity holdings for those households that do invest in stocks. Habit formation increases wealth accumulation because the intertemporal consumption smoothing motive is stronger. As a result, households start participating in the stock market very early in life, and invest their portfolios almost fully in stocks. Therefore, we conclude that, with respect to its ability to match the empirical evidence on asset allocation behavior, the internal habit formation model is dominated by its time-separable utility counterpart.
Habit Formation And Lifetime Portfolio Selection
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Author : Yoel Lax
language : en
Publisher:
Release Date : 2001
Habit Formation And Lifetime Portfolio Selection written by Yoel Lax and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2001 with categories.
A life cycle model in which an investor (a) faces i.i.d. asset returns, (b) receives no non-asset income, and (c) has an iso-elastic period utility function, predicts that the investor will allocate a constant fraction of his wealth to risky securities over his lifetime. This result is at odds with both economic intuition and the empirical evidence on asset allocation of individuals. In this work we investigate the effect that habit formation has on life cycle portfolio allocation. This amounts to relaxing assumption (c) by making period utility dependent on past consumption. We derive the optimal consumption and investment policies for a finitely-lived investor in discrete time and find that habit formation can explain increasingly conservative as well as hump-shaped investment patterns over the life cycle, both of which have been documented empirically. The crucial element determining which pattern obtains is the initial habit of a young investor. Furthermore we find that habit formation induces much stronger life cycle effects than those obtained by relaxing either assumptions (a) or (b): Return predictability is of negligible importance in a habit formation model, and labor income alone cannot generate hump-shaped investment patterns. Next we show that our basic results are robust to whether habit formation is introduced into the utility function as a difference or ratio, and to whether the habit stock consists of only one lag or a distributed lag of consumption. In contrast, the endogeneity of habit is crucial to our results--a model with a constant subsistence level, which is nested in our more general model, cannot produce the same life cycle investment patterns. Finally, we show that a continuous-time version of our habit model yields qualitatively different results.
Dynamic Portfolio Choice And Consumption Plan Under Inflation With Nominal And Indexed Bonds
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Author : Mao-Wei Hung
language : en
Publisher:
Release Date : 2009
Dynamic Portfolio Choice And Consumption Plan Under Inflation With Nominal And Indexed Bonds written by Mao-Wei Hung and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with categories.
We solve for an intertemporal portfolio-consumption choice problem under inflation. We assume that the nominal interest rate is observable while the expected inflation rate is not. The inclusion of the indexed bond in the investor's portfolio provides the investor an opportunity to perfectly hedge against the inflation risk. While the hedging demand of the nominal bonds would be crowded out proportional to the demand of the indexed bonds. The estimation risk of the estimated inflation rate would also introduce an additional hedging demand. We also show that the direction in which the interest rate and the inflation rate affect the optimal consumption-wealth ratio would rely on the elasticity of intertemporal substitution of the investor. When the elasticity of intertemporal substitution is smaller than one, the consumption-wealth ratio is increasing in the nominal interest rate and decreasing in the inflation rate; the income effect dominates. When the elasticity of intertemporal substitution is greater than one, the consumption-wealth ratio is affected in an opposite way; the substitution effect dominates. However, the consumption-wealth ratio is not decided by the real interest rate, i.e., the difference of the nominal interest rate and the inflation rate. It also depends on the absolute levels of the nominal interest rate and the inflation rate. The nominal and real consumption growth rates are derived. The nominal consumption growth is decided by the sum of the real consumption growth rate and inflation rate.
Time Non Separable Utility In Life Cycle Consumption And Portfolio Choice
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Author : Joseph P. Lupton
language : en
Publisher:
Release Date : 2002
Time Non Separable Utility In Life Cycle Consumption And Portfolio Choice written by Joseph P. Lupton and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002 with categories.
Life Cycle Effects Of Internal Habit Formation On Portfolio Choice
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Author : Tarun Gupta
language : en
Publisher:
Release Date : 2010
Life Cycle Effects Of Internal Habit Formation On Portfolio Choice written by Tarun Gupta and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.
The presence of an internal habit, interpreted as a minimum acceptable lifestyle, has important consequences for portfolio choice of agents. The risk aversion of agents varies endogenously through the life cycle depending on evolution of the agent's habit. For the case where total wealth is capitalized, I obtain analytical solutions for the value and policy functions in a continuous time finite horizon model. There is an interesting life cycle effect which I highlight. Younger agents need to sustain their habits for a longer horizon, thereby making them more risk averse and inducing them to optimally hold more conservative portfolios, as compared to older agents who have fewer outstanding periods, hence worry less about sustaining future habits and hold more aggressive portfolios. The model is applied to study portfolio decisions of retired households, in contrast to the standard model it is able to explain the data.