Simple explicit formula for near-optimal stochastic lifestyling

DOI10.1016/J.EJOR.2019.12.032zbMATH Open1441.91066arXiv1801.00980OpenAlexW2781654385WikidataQ126469490 ScholiaQ126469490MaRDI QIDQ2178104FDOQ2178104

Authors: Aleš Černý, Igor Melicherčík 

Publication date: 7 May 2020

Published in: European Journal of Operational Research (Search for Journal in Brave)

Abstract: In life-cycle economics the Samuelson paradigm (Samuelson, 1969) states that the optimal investment is in constant proportions out of lifetime wealth composed of current savings and the present value of future income. It is well known that in the presence of credit constraints this paradigm no longer applies. Instead, optimal lifecycle investment gives rise to so-called stochastic lifestyling (Cairns et al., 2006), whereby for low levels of accumulated capital it is optimal to invest fully in stocks and then gradually switch to safer assets as the level of savings increases. In stochastic lifestyling not only does the ratio between risky and safe assets change but also the mix of risky assets varies over time. While the existing literature relies on complex numerical algorithms to quantify optimal lifestyling the present paper provides a simple formula that captures the main essence of the lifestyling effect with remarkable accuracy.

Full work available at URL: https://arxiv.org/abs/1801.00980

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zbMATH Keywords

stochastic optimal controloptimal investmentpower utilitystochastic lifestylingSamuelson paradigm

Mathematics Subject Classification ID

Portfolio theory (91G10) Optimal stochastic control (93E20)

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Cited In (2)

• On optimal constrained investment strategies for long-term savers in stochastic environments and probability hedging
• The last dozen of years of or research in Czechia and Slovakia

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