Optimal portfolio choice with path dependent labor income: the infinite horizon case

Enrico Biffis, Fausto Gozzi and Cecilia Prosdocimi

Abstract: We consider an infinite horizon portfolio problem with borrowing constraints, in which an agent receives labor income which adjusts to financial market shocks in a path dependent way. This path-dependency is the novelty of the model, and leads to an infinite dimensional stochastic optimal control problem. We solve the problem completely, and find explicitly the optimal controls in feedback form. This is possible because we are able to find an explicit solution to the associated infinite dimensional Hamilton-Jacobi-Bellman (HJB) equation, even if state constraints are present. To the best of our knowledge, this is the first infinite dimensional generalization of Merton's optimal portfolio problem for which explicit solutions can be found. The explicit solution allows us to study the properties of optimal strategies and discuss their financial implications.

Date: 2020-02
New Economics Papers: this item is included in nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

Downloads: (external link)
http://arxiv.org/pdf/2002.00201 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2002.00201

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().