Approximate analytical solutions for consumption/investment problems under recursive utility and finite horizon

Campani, Carlos Heitor; García, René

doi:10.1016/j.najef.2019.03.005

Cited by 12 publications

(7 citation statements)

References 22 publications

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“…Campani and Garcia ( 2019 ) analyze the sensitivity of consumption and portfolio choices over the value of both preference parameters and for a problem similar to Campani, Garcia, and Lewin ( 2021 ) but in a single-state model. They indicate that the value of affects consumption preferences but barely affects the allocation strategy.…”

Section: Methodsmentioning

confidence: 99%

“…However, the results from the power utility are very close to those of the recursive utility, given , as expected. It occurs because the value of impacts consumption, but it minimally impacts the allocation strategy (Campani and Garcia, 2019 ). In addition, Campani, Garcia, and Lewin ( 2021 ) show that the impact of consumption-to-wealth ratio variations is also minimal in the allocation model.…”

Section: Methodsmentioning

confidence: 99%

“…For such a case, Campani, Garcia, and Lewin ( 2021 ) presented a regime-switching allocation strategy (CGL model) in continuous time based on Duffie and Epstein’s ( 1992 ) stochastic differential recursive utility function. They offered an approximate analytical solution based on Campani and Garcia ( 2019 ), given a system of partial differential equations. Campani, Garcia, and Lewin ( 2021 ) and Lewin and Campani ( 2020a , b ) present optimal allocations based on the CGL model.…”

Section: Literature Reviewmentioning

confidence: 99%

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Constrained portfolio strategies in a regime-switching economy

Lewin

Campani

2022

Financ Mark Portf Manag

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We implement an allocation strategy through a regime-switching model using recursive utility preferences in an out-of-sample exercise accounting for transaction costs. We study portfolios turnover and leverage, proposing two procedures to constrain the allocation strategies: a low-turnover control (LoT) and a maximum leverage control (MaxLev). LoT sets a dynamic threshold to trim minor rebalancing, reducing portfolio turnover, mitigating costs. MaxLev calculates dynamic adjustments to the risk aversion parameter to constrain the portfolio leverage. The MaxLev adjustments depend on the risk aversion and permitted portfolio leverage, which enables optimal strategies considering the leverage constraints. The study uses US equity portfolios, and shows that, first, models with LoT result in superior return-to-risk measures than those without it when transaction costs increase. Second, considering transaction costs, the return-to-risk measures of the models using MaxLev closely match or exceed those from the corresponding unconstrained regime-switching benchmarks. Third, MaxLev returns have lower volatility and higher return-to-risk than conventional numerically constrained benchmarks. Fourth, the certainty equivalent returns indicate that models using MaxLev and LoT outperform both single-state models and unconstrained regime-switching models with statistical significance. Supplementary Information The online version contains supplementary material available at 10.1007/s11408-022-00414-x.

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Section: Methodsmentioning

confidence: 99%

Section: Methodsmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

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Constrained portfolio strategies in a regime-switching economy

Lewin

Campani

2022

Financ Mark Portf Manag

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“…Regarding the large advantages of this class of preferences and their ability to explain financial variables, we use recursive utility to characterize investors' preferences in our economy. Hence, our work is related to the previous literature of portfolio optimization with recursive preferences (see Campbell and Viceira (2002), Campbell, Chacko, Rodriguez, and Viceira (2004), Campani, Garcia, and Lioui (2019)). More importantly, all those studies are carried out in a frictionless framework.…”

Section: Introductionmentioning

confidence: 97%

Test for Trading Costs Effect in a Portfolio Selection Problem with Recursive Utility

Carrasco¹,

Koné²

2023

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This paper addresses a portfolio selection problem with trading costs on stock market. More precisely, we develop a simple GMM-based test procedure to test the significance of rading costs effect in the economy with a áexible form of transaction costs. We also propose a two-step procedure to test overidentifying restrictions in our GMM estimation. In an empirical analysis, we apply our test procedures to the class of anomalies used in Novy-Marx and Velikov (2016). We show that transaction costs have a significant effect on investors behavior for many anomalies. In that case, investors significantly improve the out-of-sample performance of their portfolios by accounting for trading costs.

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“…Nonetheless, inspecting these reference one sees a few of the criticism aimed at the standard utility framework, as highlighted in [3], appearing again. E.g., in [12] we see a dependence on investment's horizon "The investor's horizon also plays a crucial role in optimal policies" and that the underlying model is fixed the investment timeframe.…”

Section: Introductionmentioning

confidence: 99%

Forward utility and market adjustments in relative investment-consumption games of many players

Reis¹,

Платонов²

2020

Preprint

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We study a portfolio management problem featuring many-player and mean field competition, investment and consumption, and relative performance concerns under the forward performance processes (FPP) framework. We focus on agents using power (CRRA) type FPPs for their investment-consumption optimisation problem an under common noise Merton market model and we solve both the many-player and mean field game providing closed-form expressions for the solutions where the limit of the former yields the latter.In our case, the FPP framework yields a continuum of solutions for the consumption component as indexed to a market parameter we coin "market consumption intensity". The parameter permits the agent to set a preference for their consumption going forward in time that, in the competition case, reflects a common market behaviour. We show the FPP framework, under both competition and no-competition, allows the agent to disentangle his risk-tolerance and elasticity of intertemporal substitution (EIS) just like Epstein-Zin preferences under recursive utility framework and unlike the classical utility theory one. This, in turn, allows a finer analysis on the agent's consumption "income" and "substitution" regimes, and, of independent interest, motivates a new strand of economics research on EIS under the FPP framework.We find that competition rescales the agent's perception of consumption in a non-trivial manner in addition to a time-dependent elasticity of conformity of the agent to the market's consumption intensity.

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Approximate analytical solutions for consumption/investment problems under recursive utility and finite horizon

Cited by 12 publications

References 22 publications

Constrained portfolio strategies in a regime-switching economy

Constrained portfolio strategies in a regime-switching economy

Test for Trading Costs Effect in a Portfolio Selection Problem with Recursive Utility

Forward utility and market adjustments in relative investment-consumption games of many players

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