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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27417
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| Title: | Optimal Consumption and Portfolio Allocation under Mean-Reverting
Returns: An Exact Solution for Complete Markets |
| Authors: | Wachter, Jessica A. |
| Issue Date: | 26-Sep-2000 |
| Series/Report no.: | S-AM-00-07 |
| 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 the behavior of approximate log-linear solutions. 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/2451/27417 |
| Appears in Collections: | Asset Management
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