Portfolio Selection with Subsistence Consumption Constraints and CARA Utility

We consider the optimal consumption and portfolio choice problem with constant absolute risk aversion (CARA) utility and a subsistence consumption constraint. A subsistence consumption constraint means there exists a positive constant minimum level for the agent’s optimal consumption. We use the dyn...

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Bibliographic Details
Published in:Mathematical problems in engineering 2014, Vol.2014 (2014), p.1-6
Main Authors: Shim, Gyoocheol, Shin, Yong Hyun
Format: Article
Language:English
Online Access:Get full text
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Summary:We consider the optimal consumption and portfolio choice problem with constant absolute risk aversion (CARA) utility and a subsistence consumption constraint. A subsistence consumption constraint means there exists a positive constant minimum level for the agent’s optimal consumption. We use the dynamic programming approach to solve the optimization problem and also give the verification theorem. We illustrate the effects of the subsistence consumption constraint on the optimal consumption and portfolio choice rules by the numerical results.
ISSN:1024-123X
1563-5147