OPTIMAL INVESTMENT AND CONSUMPTION STRATEGIES FOR A CLASS OF UTILITY FUNCTIONS.
Abstract
The research formalizes Irving Fisher's model of the individual under risk, and represents at the same time a generalization of Phelphs' model of personal saving (Econometrica, October 1962). The objective of the individual is postulated to be the maximization of expected utility from consumption over time where the horizon is arbitrarily distant. The individual's resources consist of an initial capital position (which may be negative) and a non-capital income stream which is known with certainty but which may possess any time-shape. The individual faces both financial opportunities (borrowing and lending) and an arbitrary number of productive investment opportunities. The interest rate is presumed to be known and invariant over time; the case when the borrowing rate exceeds the lending rate is examined for a specialized model. The returns from the productive opportunities are assumed to be random variables, whose probability distributions may differ from period to period. The basic (Fisherian) characteristic of the approach taken is that the portfolio composition decision, the financing decision, and the consumption decision are all analyzed simultaneously in one model. The vehicle of analysis is discrete-time dynamic programming.
Document Details
- Document Type
- Technical Report
- Publication Date
- Jun 01, 1966
- Accession Number
- AD0638850
Entities
People
- Niles Hemming Hakansson