Optimal Consumption And Portfolio Rules PDF Download

Excerpt from Optimal Consumption and Portfolio Rules: With Durability and Local Substitution We study a model of optimal consumption and portfolio choice which captures, in two different interpretations, the notions of local substitution and irreversible purchases of durable goods. The class of preferences we consider excludes all nonlinear time-additive and nearly all the non-time-additive utility functions used in the literature. We discuss heuristically necessary conditions and provide sufficient conditions for a consumption and portfolio policy to be optimal. Furthermore, we demonstrate our general theory by solving in a closed form the optimal consumption and portfolio policy for a particular felicity function when the prices of the assets follow a geometric Brownian motion process. The optimal consumption policy in our solution consists of a possible initial "gulp" of consumption, or a period of no consumption, followed by a process of accumulated consumption with singular sample paths. In almost all states of nature, the agent consumes periodically and invests more in the risky assets than an agent with time-additive utility whose felicity function has the same curvature and the same time-discount parameter. We compute the equilibrium risk premium in a representative investor economy with a single physical production technology whose rate of return follows a Brownian motion. In addition, we provide some simulation results that demonstrate the properties of the purchase series for durable goods with 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.