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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26608
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| Title: | Portfolio and Consumption Decisions under Mean-Revering Returns: An
Exact Solution for Complete Markets |
| Authors: | Wachter, Jessica A. |
| Issue Date: | 19-Nov-2001 |
| Series/Report no.: | FIN-01-055 |
| Abstract: | This paper solves, in closed form, the optimal portfolio choice problem
for an investor with utility over consumption under mean-reverting
returns. Previous solutions either require approximations, numerical
methods, or the assumption that the investor does not consume over his
lifetime. This paper breaks the impasse by assuming that markets are
complete. The solution leads to a new understanding of hedging demand
and of the behavior of the approximate log-linear solution. The
portfolio allocation takes the form of a weighted average and is shown
to be analogous to duration for coupon bonds. Through this analogy, the
notion of investment horizon is extended to that of an investor who
consumes at multiple points in time. |
| URI: | http://hdl.handle.net/2451/26608 |
| Appears in Collections: | Economics Working Papers
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