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Portfolio and Consumption Choice with Stochastic Investment Opportunities and Habit Formation in Preferences

2002
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Release : 2002
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Book Synopsis Portfolio and Consumption Choice with Stochastic Investment Opportunities and Habit Formation in Preferences by : Claus Munk

Download or read book Portfolio and Consumption Choice with Stochastic Investment Opportunities and Habit Formation in Preferences written by Claus Munk. This book was released on 2002. Available in PDF, EPUB and Kindle. Book excerpt: We study the dynamic consumption and portfolio choice of an investor who has habit formation in preferences and access to a complete financial market. For general, possibly non-Markov, dynamics of market prices, we provide an exact characterization of the optimal behavior in terms of two relatively simple and intuitively interpretable stochastic processes. We study in more detail the optimal strategies in two concrete examples of time-varying investment opportunities. Firstly, we derive a closed-form solution of the optimal consumption and portfolio choice with mean-reverting stock returns. Secondly, with Cox-Ingersoll-Ross interest rate dynamics we can express the optimal strategies in terms of the solution to a partial differential equation, which has an explicit solution for time-additive preferences, but not with habit formation. Our numerical examples show that, while hedging demands for various assets are affected differently by habit persistence, the main effect on relative asset allocations stems from the fact that some assets (bonds and cash) are better investment objects than others (stocks) when it comes to ensuring that future consumption will not fall below the habit level. The implications of habit persistence in models with labor income are also addressed.

Consumption and Portfolio Choice Under Internal Multiplicative Habit Formation

2018
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Release : 2018
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Book Synopsis Consumption and Portfolio Choice Under Internal Multiplicative Habit Formation by : Servaas van Bilsen

Download or read book Consumption and Portfolio Choice Under Internal Multiplicative Habit Formation written by Servaas van Bilsen. This book was released on 2018. Available in PDF, EPUB and Kindle. Book excerpt: This paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit. We obtain closed-form policies under general utility functionals and stochastic investment opportunities, by developing a non-trivial linearization to the budget constraint. This enables us to explicitly characterize how habit formation a ffects the marginal propensity to consume and optimal stock-bond investments. We also show that in a setting which combines habit formation with Epstein-Zin utility, consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease.

Portfolio Choice with Internal Habit Formation

2003 Asset allocation
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Release : 2003
Genre : Asset allocation
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Book Synopsis Portfolio Choice with Internal Habit Formation by : Francisco J. Gomes

Download or read book Portfolio Choice with Internal Habit Formation written by Francisco J. Gomes. This book was released on 2003. Available in PDF, EPUB and Kindle. Book excerpt:

Portfolio Choice with Internal Habit Formation

2008
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Release : 2008
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Book Synopsis Portfolio Choice with Internal Habit Formation by : Francisco Gomes

Download or read book Portfolio Choice with Internal Habit Formation written by Francisco Gomes. This book was released on 2008. Available in PDF, EPUB and Kindle. Book excerpt: Motivated by the success of internal habit formation preferences in explaining asset pricing puzzles, we introduce these preferences in a life-cycle model of consumption and portfolio choice with liquidity constraints, undiversifiable labor income risk and stock-market participation costs. In contrast to the initial motivation, we find that the model is not able to simultaneously match two very important stylized facts: A low stock market participation rate, and moderate equity holdings for those households that do invest in stocks. Habit formation increases wealth accumulation because the intertemporal consumption smoothing motive is stronger. As a result, households start participating in the stock market very early in life, and invest their portfolios almost fully in stocks. Therefore, we conclude that, with respect to its ability to match the empirical evidence on asset allocation behavior, the internal habit formation model is dominated by its time-separable utility counterpart.

Asset Pricing and Portfolio Choice Theory

2017 Business & Economics
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Release : 2017
Genre : Business & Economics
Kind : eBook
Book Rating : 144/5 ( reviews)

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Book Synopsis Asset Pricing and Portfolio Choice Theory by : Kerry Back

Download or read book Asset Pricing and Portfolio Choice Theory written by Kerry Back. This book was released on 2017. Available in PDF, EPUB and Kindle. Book excerpt: Today all would agree that Mexico and the United States have never been closer--that the fates of the two republics are intertwined. Mexico has become an intimate part of life in almost every community in the United States, through immigration, imported produce, business ties, or illegal drugs. It is less a neighbor than a sibling; no matter what our differences, it is intricately a part of our existence. In the fully updated second edition of Mexico: What Everyone Needs to Know(R), Roderic Ai Camp gives readers the most essential information about our sister republic to the south. Camp organizes chapters around major themes--security and violence, economic development, foreign relations, the colonial heritage, and more. He asks questions that take us beyond the headlines: Why does Mexico have so much drug violence? What was the impact of the North American Free Trade Agreement? How democratic is Mexico? Who were Benito Juarez and Pancho Villa? What is the PRI (the Institutional Revolutionary Party)? The answers are sometimes surprising. Despite ratification of NAFTA, for example, Mexico has fallen behind Brazil and Chile in economic growth and rates of poverty. Camp explains that lack of labor flexibility, along with low levels of transparency and high levels of corruption, make Mexico less competitive than some other Latin American countries. The drug trade, of course, enhances corruption and feeds on poverty; approximately 450,000 Mexicans now work in this sector. Brisk, clear, and informed, Mexico: What Everyone Needs To Know(R) offers a valuable primer for anyone interested in the past, present, and future of our neighbor to the South. Links to video interviews with prominent Mexicans appear throughout the text. The videos can be accessed at through The Oxford Research Encyclopedia of Latin American History at http: //latinamericanhistory.oxfordre.com/page/videos/

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