Robust consumption portfolio optimization with stochastic differential utility

Pu, Jiangyan; Zhang, Qi

doi:10.1016/j.automatica.2021.109835

Cited by 7 publications

(1 citation statement)

References 32 publications

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“…With this in mind, Kraft et al (2013); Xing (2017); Kraft et al (2017); Pu and Zhang (2021) provide suitable verification theorems for the associated Bellman equations used to solve some consumption-portfolio decision problems in diffusive markets. In contrast, Chen et al (2021) examine the role played by information in continuous-time optimal consumption-portfolio problems when stock returns are unobservable.…”

Section: Introductionmentioning

confidence: 99%

Co-jumps and recursive preferences in portfolio choices

Oliva

Stefani

2023

Ann Finance

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This paper investigates a multivariate, dynamic, continuous-time optimal consumption and portfolio allocation problem when the investor faces recursive utilities. The economy we are considering is described through both diffusion and discontinuities in the dynamics. We derive an approximated closed-form solution to optimal rules by exploiting standard dynamic programming techniques. Our findings are manifold. First, we obtain dynamic optimal weights, inversely proportional to volatility. Second, we show that both co-jumps frequency and intensity play a crucial role, as they considerably limit potential losses in the investors’ wealth. Third, we prove that jumps in precision reinforce the effect of jumps in price, further reducing optimal allocation. Finally, we highlight how co-jumps may influence investors’ choices regarding intertemporal consumption.

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