LIFETIME CONSUMPTION AND INVESTMENT FOR WORST-CASE CRASH SCENARIOS

Author:

DESMETTRE SASCHA1,KORN RALF12,SEIFRIED FRANK THOMAS1

Affiliation:

1. Department of Mathematics, University of Kaiserslautern, Erwin-Schrödinger-Straße, 67663 Kaiserslautern, Germany

2. Department of Financial Mathematics, Fraunhofer Institute for Industrial Mathematics, Fraunhofer-Platz 1, 67663 Kaiserslautern, Germany

Abstract

We investigate worst-case optimal consumption and portfolio decisions under the threat of a market crash on an infinite time horizon. We provide a closed-form solution for constant relative risk aversion and establish a rigorous verification result. More specifically, using martingale arguments we demonstrate that the optimal consumption-portfolio strategy can be characterized as the indifference strategy that achieves the best performance in the no-crash scenario. In addition, we find a dual characterization of the optimal strategy as the indifference strategy that minimizes the crash exposure. Finally, we quantify the impact of the crash on consumption and portfolio choice and analyze it in terms of the investor's risk and time preferences and prudence.

Publisher

World Scientific Pub Co Pte Lt

Subject

General Economics, Econometrics and Finance,Finance

Cited by 7 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

1. OPTIMAL PORTFOLIO CHOICE WITH CRASH AND DEFAULT RISK;International Journal of Theoretical and Applied Finance;2022-06

2. OPTIMAL PORTFOLIO CHOICE WITH CRASH RISK AND MODEL AMBIGUITY;International Journal of Theoretical and Applied Finance;2022-02

3. A worst-case approach for interest rate stresses and stock crashes;IMA Journal of Management Mathematics;2021-06-11

4. MULTI-ASSET WORST-CASE OPTIMAL PORTFOLIOS;International Journal of Theoretical and Applied Finance;2019-06

5. Worst-case portfolio optimization in discrete time;Mathematical Methods of Operations Research;2019-04-30

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